DBRS: Wells Fargo Generates Solid 1Q14 Results Despite Difficult Operating Environment

Summary:
• Solid 1.3% quarter-on-quarter (QoQ) average loan growth and 1.6% QoQ average deposit growth.
• Broadly improved credit performance precipitates a $500 million reserve release.
• Record earnings reflected resilience in a difficult operating environment, yet core revenues (excluding gains on debt securities and equity investments) were down 1.6% QoQ and 6.7% year-on-year (YoY).
• DBRS rates Wells Fargo & Company Issuer & Senior debt at AA with a Stable trend.

DBRS Inc. (DBRS) considers Wells Fargo & Company’s (Wells Fargo or the Company) 1Q14 results as solid, especially considering the difficult operating environment facing banks.

Indeed, Wells Fargo, continues to consistently lead most of its large banking peers in financial performance and in 1Q14 generated good organic loan and deposit growth, strong earnings, and sustained record 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 $5.6 billion that were up 4.4% QoQ and 13.7% YoY, as a tax benefit, strong equity investment gains, lower expenses and a lower credit loss provision more than offset the decline in net interest income. Mortgage banking income declined 3.8% QoQ and 46% YoY. The strong rise in servicing income over the past year from an improved mortgage servicing rights valuation and economic hedge gains, however, has been able to partially offset the decline in production revenue. Meanwhile, expenses declined 1.1% QoQ and 3.6% YoY while the improved efficiency ratio of 57.9% (60bps QoQ improvement) was within the Company’s targeted expense range. DBRS notes that 1Q14 expenses benefitted from professional services returning to more normalized levels with other sizable declines seen in equipment and advertising expense.

Wells Fargo liquidity and capitalization continue to be maintained at ample levels despite significant share buybacks and dividend distributions to shareholders. On March 26th, the Federal Reserve Board announced that it had no objection to the Company’s 2014 Capital Plan, which included a proposed 16.7% dividend increase to $0.35 per share and an increase in share buybacks. The Company also published its estimated fully phased-in Basel III Tier 1 Common ratio of 10.04% at 3/31/14, which is above their well-capitalized requirement

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.]