DBRS: Wells Fargo’s Earnings Reflect Accelerating Organic Growth and Continued Bank Leadership

Summary:
• WFC’s net income was relatively flat on a linked quarter basis as growth in net interest income was offset by a higher provision for credit losses and increased expenses. Noninterest income was relatively stable on a linked quarter basis.
• Continued strong credit performance precipitated an additional reserve release this quarter although the amount continues to decelerate. DBRS sees declining future reserve releases as likely due to loan growth and the slowing rate of credit improvement as credit normalizes.
• Loans and deposits continued to grow apace this quarter. Core loans and deposits both increased at an annualized rate of 13% over the quarter.
• 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) 4Q14 results as relatively stable with improved linked quarter revenues in a still difficult operating environment. Additionally, core revenues (on a DBRS-adjusted basis which backs out gains and losses from debt securities and equity investments) were also higher on a linked quarter basis. However, noninterest expenses increased reflecting elevated personnel, equipment and outside professional services expenses, some of which are viewed as typically higher in the fourth quarter. In DBRS’s view, overall results do validate the Company’s diversified business operating model that is primarily focused on commercial and consumer banking.

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 ongoing headwinds of the challenging interest rate environment, increased regulatory expenses and significantly enhanced liquidity and capital requirements.

Core loans grew 13% (annualized) quarter-on-quarter (QoQ) with commercial and industrial, construction, lease financing, first mortgages, auto and credit card loans all reflecting ample growth. Some of the loan growth was due to financing related to the sale of government guaranteed student loan to Navient and the Dillard’s credit card portfolio acquisition. The loan growth, as well as growth in the investment portfolio, drove a 2.3% or $239 million QoQ increase in net interest income. Wells Fargo’s broadly diversified franchise generates almost half of revenues from noninterest income sources. Mortgage banking was down $118 million on a linked quarter basis with seasonally lower origination volumes, however, the percentage of refinance originations have inched up as mortgage rates have declined.

Expenses were up 3.3% QoQ, and the Company-calculated efficiency ratio of 59% for 4Q14 remained at the top end of the Company’s targeted efficiency range of 55% to 59%. The Company is targeting the same range in 2015. The full year efficiency ratio was 58.1%.

Wells Fargo’s liquidity and capitalization continue to be maintained at ample levels despite significant share buybacks and dividend distributions to shareholders, including $3.9 billion returned to shareholders in 4Q14. The Company reported an estimated Basel III fully phased-in (Advanced Approach) Common Equity Tier 1 ratio of 10.44% at December 31, 2014, down 4 basis points QoQ. This is comfortably above expected requirements as well as the Company’s 10% targeted level.

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.