DBRS Confirms Wells Fargo & Company Senior Debt at AA; Trend Stable

DBRS, Inc. (DBRS) has today confirmed its ratings for Wells Fargo & Company (Wells Fargo or the Company) and its subsidiaries, including Wells Fargo’s Issuer & Senior Debt rating of AA and Short-Term Instruments rating of R-1 (middle). The trend on all ratings remains Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

DBRS views Wells Fargo’s highly successful franchise, predictable and diversified earnings stream, consistent and effective management, corporate culture and operating strategy, strong capital levels and ample liquidity as commensurate with its high ratings and Stable trend. The Company continues to outperform most peers in an industry operating environment generally characterized by elevated expense levels and revenue growth challenges. The Company’s sizeable exposure to the U.S. housing market that consists of its large servicing and origination platform, as well as its on-balance sheet mortgage portfolio that includes a significant level of junior lien loans, are also considered in DBRS’s rating. DBRS sees the upside ratings potential as limited, given the Company’s superior ratings level and a willingness to take on managed risk in order to achieve respectable returns on capital. Conversely, a sustained deterioration in asset quality, derived from a perceived increase in risk tolerance, or regulatory constraints or reforms that impair the Company’s franchise or significantly constrain earnings would likely have negative rating implications.

Wells Fargo’s diverse national franchise includes the largest U.S. branch network, the second largest U.S. deposit share, leading shares in residential mortgage origination and servicing and top tier positions in middle market and small business lending, auto finance and debit card issuance. DBRS remains mindful that the Company’s market share leadership positions and size as the fourth largest bank in the U.S. by assets places Wells Fargo under heightened regulatory and media scrutiny. DBRS notes however, that the Company’s relatively modest, although growing, presence in capital market businesses compared to its large bank peers enables it to avoid most of the volatility and risk inherent in those businesses in addition to heightened regulatory oversight. Indeed, the Company also has negligible history of adverse findings that have plagued other banks with significant presence in the capital markets.

DBRS considers Wells Fargo’s recent operating results as solid, especially considering the difficult interest rate environment facing banks. Wells Fargo consistently leads most of its large banking peers in financial performance and has been able to generate organic loan and deposit growth, strong earnings, and sustained record profitability that are supportive of its ratings level. That being said, DBRS-adjusted core net revenues (income before provisions and taxes - IBPT) fell 4.4% in 2014 as net interest margin pressure constrained net interest income but IBPT was more than offset by the decline in credit costs and stronger equity investment income (which DBRS excludes in adjustment). DBRS believes a rising interest rate environment will also be revenue constructive given the Company’s asset sensitivity. While the Company’s loan growth is primarily organic, Wells Fargo is also opportunistic as evidenced by the April 2015 announced purchase of $9 billion of CRE loans from GE Capital as well as financing provided to a Blackstone’s commercial mortgage REIT for the purchase of an additional $4.6 billion of first-lien commercial mortgage loans.

Underpinning the ratings is the Company’s ability to produce robust quarterly revenues, IBPT and net income consistently. While earnings have generated a solid level of return as measured by return on assets (ROA) and return on equity (ROE), the Company has benefitted from a significant level of reserve releases, as credit quality has improved, benefitting the bottom line. Quarterly provisions, which peaked at $6.1 billion during 3Q09, were only $608 million in the most recent quarter, or just 7% of IBPT. In DBRS’s view, the Company’s generally consistent results validate the soundness of its diversified operating model that is primarily focused on commercial and consumer banking with significant sources of fee income.

Asset quality trends continue to improve for Wells Fargo primarily driven by appreciation in real estate valuations, as well as an improving economy. By virtue of real estate lending (commercial and residential) comprising over half of its loan portfolio (per regulatory data), the Company would be susceptible to accelerated losses if real estate valuations were to weaken significantly. That said, Wells Fargo’s exposure to real estate is highly diversified by both geography and product type. The Company has also taken steps to reduce the risk level of residential mortgage loans it retains in portfolio. For instance, more recent vintages have a higher FICO score, lower loan to value and are more likely to be in a first lien position than the pre-crisis consumer real estate portfolio. Additionally, the Company’s non-strategic/liquidating loan portfolio continues to run off.

DBRS views the Company’s capital position as sound. Specifically, capital levels have steadily grown over the past year despite ongoing capital management activity and balance sheet growth. In March 2015, the Federal Reserve Board announced that it had no objection to the Company’s 2015 Capital Plan, which included a proposed 7% dividend increase to $0.375 per share.

Funding is considered robust. Indeed, the Company has a proven ability to grow and fund its balance sheet with organic deposit growth. This was most recently evidenced by 9% year over year (YoY) deposit growth in the most recent quarter. Also noteworthy is that the loan to deposit ratio continues to improve as the rate of deposit growth has exceeded loan growth. Wells Fargo maintains a high level of liquidity with over $311.1 billion in cash and equivalents, as of March 31, 2015, representing 18% of total assets. Including available for sale securities, liquid assets represent over one-third of the balance sheet. The Company reported that it is already compliant with domestic, fully phased-in Basel III liquidity coverage ratio rules.

Wells Fargo & Company, a financial holding company headquartered in San Francisco, reported $1.74 trillion in assets as of March 31, 2015.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Rating Committee Chair: John van Boxmeer
Initial Rating Date: 10 December 1999
Most Recent Rating Update: 24 June 2014

For additional information on this rating, please refer to the linking document under Related Research.