DBRS: Wells Fargo Generates Strong 4Q13 Earnings Despite Weaker YoY Revenues

Summary:

• DBRS-adjusted revenues were up 0.9% QoQ, but were down 5.8% YoY; mostly due to lower mortgage banking revenues
• Credit continued to improve virtually across the board
• DBRS rates Wells Fargo & Company Issuer & Senior debt at AA with a Stable trend.

With the release of Wells Fargo & Company’s (Wells Fargo or the Company) 4Q13 results, DBRS considers the net quarterly earnings performance to be strong even with the nearly 6.0% decline in YoY revenues driven by the expected decline in mortgage banking.

Despite the current environmental challenges that are negatively impacting many banks, the Company continues to consistently lead most of its large banking peers in financial performance and in 4Q13 produced good organic loan and deposit growth, strong recurrent earnings, and sustained profitability that support its ratings level. Importantly, it was able to do this while maintaining sound risk management, liquidity, and capital.

Wells Fargo’s broadly diversified franchise managed to produce record net earnings (to common stock) of $5.4 billion that were up 1.0% QoQ and 10.5% YoY, as the favorable credit environment and associated modest provisioning needs helped to offset the expected decline in mortgage banking revenue. Adjusted expenses declined very modestly QoQ and increased 0.7% YoY as the Company continued to operate within its targeted expense range. DBRS notes that 4Q13 expenses included elevated costs from professional services from business investments and compliance and regulatory initiatives.

Diversity of the earnings base was highlighted by strong loan growth across most categories (except home equity) and another good quarter for trust and investment fees. Net interest income rose due to good average loan growth that managed to offset the 12 bps NIM decline (half of which was attributed to the growth in deposits).

Credit continued to improve with a marginally lower rate of charge-offs and declining NPAs that precipitated an earnings enhancing $600 million reserve release. This was down from a $900 million release in 3Q13 but up from the $250 million 4Q12 release when credit costs tracked significantly higher. Despite the release, the Company still had adequate reserve coverage that increased to 93% of nonaccrual loans in the quarter. Moreover, the balance of the Company’s unresolved mortgage repurchase demands fell nearly 46% due to the 4Q13 Fannie Mae settlement.

Wells Fargo liquidity and capitalization continue to be maintained at ample levels despite significant share buybacks and dividend distributions to shareholders. Its Tier 1 Common ratio under Basel I was up 22 bps to 10.82% with its estimated Basel III up 22 bps to 9.78%.

DBRS rates Wells Fargo & Company Issuer & Senior debt at AA with a Stable trend.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]