DBRS Morningstar Confirms Wells Fargo & Company at AA (low); Trend Remains Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Wells Fargo & Company (Wells Fargo or the Company), including the Company’s Long-Term Issuer Rating of AA (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Wells Fargo Bank, N.A. (the Bank). The trend for all long-term ratings at the Company and all ratings at the Bank remains Negative. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects the scale, quality and diversity of Wells Fargo’s franchise. Moreover, the strong balance sheet provides support for the ratings, including a robust deposit base, sound asset quality and ample capital. Positively, the economic fallout from the Coronavirus Disease (COVID-19) pandemic remains manageable from an asset quality and capital perspective. The ratings also consider the weaker than peer financial results.

The Negative trend reflects the ongoing pressure on revenues and expenses at the Company, partially as a result of the low-rate environment, but also due to the added pressure of managing under an asset cap that was imposed as part of the February 2018 regulatory Consent Order. This order stemmed from the sales practices scandal and other missteps that first surfaced almost five years ago. We had anticipated that the asset cap would have been lifted by now, which would have helped alleviate revenue and expense pressures. The inability to grow assets to offset net interest margin pressure has resulted in weaker revenue generation. Meanwhile, the expense base remains elevated, as the Company continues to rebuild its risk management infrastructure while absorbing litigation and other conduct costs.

RATING DRIVERS
Given the Negative trend, an upgrade of Wells Fargo’s ratings is unlikely. However, if the Company is able to show a positive trajectory in revenue growth, the level of earnings, as well as operating efficiency, the ratings would be returned to Stable.

Conversely, ratings would be downgraded if Wells Fargo’s performance continues to be weaker than its global peers and the Company is unable to show a sustained improvement in profitability metrics, including operating efficiency.

RATING RATIONALE
Wells Fargo reported net income of $4.7 billion in 1Q21, significantly improved from $3.0 billion earned last quarter and $653 million earned in 1Q20. The improved linked-quarter earnings reflect a reduction in expenses, higher revenue, and a reserve release. Wells Fargo remains focused on simplifying the company and announced the sale of both its asset management and corporate trust businesses this quarter. These sales are anticipated to close in 2H21, resulting in an estimated pre-tax gain of approximately $1.2 billion. The previously announced sale of the student loan portfolio was partially completed in 1Q21, resulting in net pre-tax gain (net of goodwill write-down) of $104 million. Despite the improvement, profitability metrics continue to lag those of similarly rated peers.

Wells Fargo's revenues inched up 1% linked-quarter, as lower net interest income was offset by higher non-interest income. While most non-interest income categories were higher linked-quarter, growth in investment banking and mortgage banking were particularly strong. However, modest loan demand and low-interest rates remain a headwind for revenue growth. Loan demand could improve during the year as the economy improves. Expenses declined 5% linked-quarter, as lower restructuring charges and operating losses were partially offset by seasonally higher personnel expense. Wells Fargo remains focused on improving its operating efficiency which should see more impactful results this year.

Asset quality indicators remain sound with non-performing assets, nonaccrual loans and net charge-offs all declining linked-quarter. Despite the reserve release, coverage of the loan portfolio at 2.09% of total loans remains substantial, especially given current loss levels. DBRS Morningstar continues to view asset quality and credit risk management as key strengths for Wells Fargo and an area where the Company has historically outperformed peers.

Balance sheet trends remained favorable. Funding is considered robust. Indeed, the Company has a proven ability to grow and fund its balance sheet with deposits. Additionally, Wells Fargo has ready access to wholesale funding in a variety of markets. Given its balance sheet and business mix, Wells Fargo is less reliant on market-based funding sources than some of its peers.

Capital levels continue to build, with the Company reporting $33 billion of excess capital over its CET1 regulatory minimum at quarter end. The CET1 ratio (standardized approach) was estimated to be 11.8% at March 31, 2021, up 20 basis points linked quarter. During the quarter, Wells Fargo repurchased $596 million of common stock.

Headquartered in San Francisco, Wells Fargo & Company, a financial holding company, reported $1.96 trillion in assets as of March 31, 2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Wells Fargo & Company are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong/Strong; Capitalization – Very Strong/Strong.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations,
DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021): https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, DBRS Morningstar Global Criteria: Rating Principal-Protected Market-Linked Securities (January 15, 2021): https://www.dbrsmorningstar.com/research/372118/dbrs-morningstar-global-criteria-rating-principal-protected-market-linked-securities.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) was used to evaluate the Issuer, DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) was utilized to rate subsidiaries guaranteed by the Issuer, DBRS Morningstar Criteria: Rating Principal-Protected Market-Linked Securities (January 15, 2021) was used to rate select issuances of these types of securities, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) was used to analyze any ESG implications on the ratings.

The last rating action on this issuer took place on May 21, 2020, when the trend for all long-term ratings at the Company and all ratings at the Bank were revised to Negative from Stable.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: John Mackerey, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director – Head of NA FIG
Initial Rating Date: December 10, 1999

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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