DBRS: Wells Fargo’s Stable 3Q14 Results Reflect Continued Organic Growth

Summary:
• WFC’s net income was flat on a linked quarter basis as growth in net interest income was offset by a higher provision for credit losses. Noninterest income and noninterest expense were relatively stable on a linked quarter basis.
• While lower this quarter, continued strong credit performance precipitated an additional reserve release. Future reserve releases are expected to be lower as the rate of credit improvement slows and loans grow.
• Loans and deposits continued to steadily grow this quarter. Core loans and deposits increased at an annualized rate of 6% and 4%, respectively, as compared to 2Q14 period-end.
• 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) 3Q14 results as relatively stable with improved linked quarter revenues. However, core revenues (on a DBRS-adjusted basis which backs out gains and losses from debt securities and equity investments) were down modestly linked quarter. Lower investment banking fees as well as lower servicing income were the primary drags on noninterest income.

Wells Fargo continues to consistently lead most of its large banking peers in financial performance including returns on assets and equity. The Company’s solid organic loan and deposit growth, strong and sustained earnings, and robust capital generation support its ratings level. Importantly, the Company has been able to achieve these strong and consistent results despite the headwinds of the challenging interest rate environment, increased regulatory expenses and a significant liquidity build.

Core loans grew 6% (annualized) quarter-on-quarter (QoQ) with commercial and industrial, construction, mortgage, auto and credit card loans all reflecting strong growth. The loan growth, as well as higher purchased credit-impaired accretion income and a higher day count this quarter, drove a 1.4% or $150 million QoQ increase in net interest income. Wells Fargo’s broadly diversified franchise generates almost half of revenues from noninterest income sources. Mortgage banking, down $90 million on a linked quarter basis, saw modestly increased production this quarter as well as higher gain on sale margins which was offset by lower net servicing income.

Expenses were flat QoQ (up just 0.44%), and the Company-calculated efficiency ratio, at 57.7% for 3Q14, remained within the Company’s targeted expense range of 55% to 59%.

Wells Fargo liquidity and capitalization continue to be maintained at ample levels despite significant share buybacks and dividend distributions to shareholders including $3.6 billion returned to shareholders in 3Q14. The Company also published its estimated Basel III fully phased-in (Advanced Approach) Common Equity Tier 1 ratio of 10.46% at September 30, 2014, which is comfortably above expected requirements.

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.