DBRS: Wells Fargo’s Solid 2Q14 Results On Mortgage Banking, Brokerage, and Organic Loan Growth

Summary:
• WFC revenues (DBRS-adjusted) grew 3.8% quarter-on-quarter (QoQ) on better mortgage banking, trust and investment fees and net interest income from loan growth. Revenues (DBRS-adjusted) were down 3.7% year-on-year (YoY) primarily due to mortgage banking.
• Continued improved credit performance precipitates a $500 million reserve release but future releases are expected to be lower as credit improvement slows and loans grow.
• Modest rebound in mortgage business as market shifts from refinance to purchase but 2Q14 originations were only 42% of 2Q13 level.
• 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) 2Q14 results as solid with improved QoQ core revenue and positive operating leverage (on a DBRS-adjusted basis).

Indeed, Wells Fargo continues to consistently lead most of its large banking peers in financial performance and in 2Q14 generated good deposit and organic loan growth, strong earnings, and sustained profitability that support its ratings level. Importantly, it was able to do this maintaining sound risk management and capital while growing liquidity.

Wells Fargo’s broadly diversified franchise generated core revenue growth as QoQ mortgage banking income grew 14% but the purchase market has been somewhat disappointing with mortgage income down 39% YoY. The Wealth, Brokerage and Retirement (WBR) segment had another robust quarter with growth in client and managed assets and strong net income growth (15% QoQ, 25% YoY).

Core loans grew 2% QoQ with commercial and industrial, auto and foreign loans reflecting very strong average balance growth. The loan growth drove a 1.7% or $176 million QoQ increase in net interest income. Also noteworthy was the transfer of $9.7 billion in government-guaranteed student loans from the non-strategic/liquidating loan portfolio to held-for-sale.

Expenses grew 2.1% QoQ but declined 0.5% YoY and the Company-calculated efficiency ratio was flat QoQ at 57.9% (within the Company’s targeted expense range of 55% to 59%). DBRS notes that the largest drivers of the QoQ expense increase were a $205 million increase in litigation accruals, an $87 million increase in project-related professional services and $69 million increase in advertising.

Wells Fargo liquidity and capitalization continue to be maintained at ample levels despite significant share buybacks and dividend distributions to shareholders. The Company also published its estimated fully phased-in (Advanced Approach) Basel III Tier 1 Common ratio of 10.09% at 6/30/14, which is comfortably above their well-capitalized requirement.

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

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