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 the Company’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 scaled and growing franchise, predictable and diversified earnings stream, consistent and effective management, 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 still coping with elevated regulatory expenses and a challenging revenue environment. The Company’s sizeable exposure to the U.S. housing market that consists of its large servicing and origination platform, as well as its growing on-balance sheet mortgage portfolio, are also considered in DBRS’s rating.

Wells Fargo’s national franchise includes the largest U.S. branch network, the second largest U.S. deposit market 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 third largest bank in the U.S. by assets places Wells Fargo under heightened regulatory and media scrutiny. DBRS notes however, that the Company’s still relatively modest, although growing, presence in capital market businesses compared to its large bank brethren enables it to avoid most of the volatility and risk inherent in those businesses in addition to heightened regulatory oversight.

DBRS considers Wells Fargo’s recent operating results as remaining solid, especially considering the challenging prolonged low interest rate environment facing the industry. Wells Fargo consistently leads most of its large banking peers in financial performance and has been able to generate solid organic loan and deposit growth, strong earnings, and growing profitability that are supportive of its ratings level. Nonetheless, a lack of reserve releases in recent quarters and loan growth has increased loan loss provisioning needs, which has reduced net income. 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.

Given its asset sensitivity, Wells Fargo, like most banks, would benefit from higher interest rates. Positively, the Company has still been able to grow net interest income in this environment through both loan and core deposit growth. While most of the loan growth has been organic, Wells Fargo has also opportunistically acquired assets, including a large share of dispositions and businesses from GE Capital, which collectively have added approximately $43 billion in assets.

Asset quality trends continue to be relatively benign with Wells Fargo benefitting from appreciation in real estate valuations, as well as an improving economy. Even with deterioration seen within the Company’s energy portfolio, net charge-offs remain at unsustainably low levels. The Company’s residential real estate exposure is sizeable at 36% of total loans and leases, but is highly diversified by both geography and product type. Moreover, the Company’s newer originations that it retains in portfolio are less risky with higher FICO scores, lower loan to values 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. At $17.8 billion, or less than 2% of total loans and leases, oil and gas loans remain the primary challenge. The Company has prudently built reserves against this portfolio, which DBRS continues to view as manageable although losses in this portfolio could remain elevated in coming quarters.

Funding is considered robust. Indeed, the Company has a proven ability to grow and fund its balance sheet with low-cost deposits. Wells Fargo remains predominately deposit funded, with deposits funding over two-thirds of its balance sheet, as of March 31, 2016. Wells Fargo also has ready access to wholesale funding in a variety of markets. Debt maturities are well distributed, and significant liquidity is held in the form of cash and liquid assets at both the parent company and bank level. Wells Fargo maintains a high level of liquidity with approximately $522 billion in cash, short-term investments, government securities and agency MBS, as of March 31, 2016, representing 28% of total assets. The Company is compliant with domestic Basel III liquidity coverage ratio rules with an internal buffer. Parent long-term debt has increased as the Company prepares for final rules and implementation surrounding TLAC.

DBRS views the Company’s capital position as sound. Capital levels have kept pace with balance sheet growth despite ongoing capital management activity. The Common Equity Tier 1 under Basel III Standardized Approach, fully phased-in, was 10.61% at March 31, 2016, well above the fully phased-in requirement of 9%, including the 2% G-SIB capital surcharge, as well as the Company’s 10% internal target.

Headquartered in San Francisco, Wells Fargo & Company, a financial holding company, reported $1.85 trillion in assets as of March 31, 2016.

RATING DRIVERS
DBRS sees the upside ratings potential as unlikely, 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 material decline from peer leading profitability levels or a perceived notable increase in risk appetite or worse than peer deterioration in asset quality could have negative rating implications.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (December 2015), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), DBRS Criteria: Rating Market-Linked Securities (March 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016) which can be found on our website under 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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: December 10, 1999
Most Recent Rating Update: November 12, 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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