DBRS: Wells Fargo’s 1Q Results Solid; Mortgage Uptick and Lower Reserve Release Noteworthy

DBRS Inc. (DBRS) considers Wells Fargo & Company’s (Wells Fargo or the Company) 1Q15 results as sound although (DBRS-adjusted) revenues were nearly flat Quarter-on-Quarter (QoQ) reflecting some seasonality, as well as the still challenging operating environment, yet revenues were up 4.7% Year-over-Year (YoY) on higher earning assets, trust and investment fees and card fees. However, providing some offset, noninterest expenses decreased QoQ reflecting a decline in equipment and outside professional services expenses, some of which are 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 with significant sources of fee 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 organic 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 modestly QoQ primarily driven by growth in nonconforming mortgage, real estate construction, auto, security-based lending and student loans. Some of the previous quarter’s loan growth was due to a financing related to the sale of government guaranteed student loans to Navient, the Dillard’s department store credit card portfolio acquisition, as well as seasonally higher credit card balances. DBRS notes that 2Q and 3Q balances should benefit from the recently-announced GE Capital CRE loan purchase and Blackstone loan financing. The lower day count and a nine basis point decline in the NIM, drove a 1.7% or $190 million QoQ decrease in net interest income (TE) over the quarter.

Wells Fargo’s broadly diversified franchise generates almost half of its revenues from noninterest income sources. Noninterest income (DBRS-adjusted), rose 1.6% QoQ, reflecting varied trends among individual fee items. For instance, some fees, such as card fees, were seasonally lower. However, there were offsets including mortgage banking, which increased on higher origination volume, and gain on sale, and insurance, which was seasonally higher on crop insurance premiums. In mortgage, the percentage of refinance originations have inched up as mortgage rates have declined. Expenses were lower QoQ, and the Company-calculated efficiency ratio of 58.8% for 1Q15 remained at the top end of the Company’s targeted efficiency range of 55% to 59%.

Wells Fargo’s liquidity and capitalization continue to be maintained at ample levels despite ongoing share buybacks and dividend distributions to shareholders, including $3.3 billion returned to shareholders in 1Q15. The Company reported an estimated Basel III fully phased-in (Advanced Approach) Common Equity Tier 1 ratio of 10.53% at March 31, 2015, up 10 basis points QoQ. This is comfortably above the Company’s 10% targeted level. DBRS notes that the Company received regulatory approval to use Advanced Approaches in its Basel III capital calculations starting 2Q15 without increased Advanced Approach RWA. During the quarter, the Company’s capital plan submitted under CCAR received no objection from the Federal Reserve and, subject to board approval, an approximately 7% dividend increase is expected for 2Q15.

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.