Morningstar DBRS Confirms Wells Fargo & Company’s LT Issuer Rating at AA (low); Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit 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, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Wells Fargo Bank, N.A. (the Bank). The trend for all credit ratings is Stable. 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 CREDIT RATING CONSIDERATIONS
The credit ratings confirmation and Stable trend reflect the scale, quality and diversity of Wells Fargo’s franchise. Wells Fargo maintains a strong balance sheet, with ample liquidity and capital, which provides support for the credit ratings, including a robust deposit base, sound asset quality and solid capital. The Company’s operating results have shown improvement as higher rates have boosted net interest income (NII) in 2023 versus 2022 while expenses outside of operating losses have been relatively flat.

The credit ratings also consider the progress Wells Fargo has made resolving legacy regulatory issues and improving its risk management framework, while absorbing elevated litigation and operating losses. The Company is still required to manage 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 in September 2016.

CREDIT RATING DRIVERS
Given Wells Fargo’s high credit ratings and remaining regulatory issues, a credit ratings upgrade is unlikely. The credit ratings would be downgraded if there were a sustained or outsized deterioration in asset quality or profitability metrics.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong
Wells Fargo is the third largest U.S. bank by assets with $1.96 trillion in assets as of March 31, 2024. Wells Fargo’s franchise strength stems from its highly diversified and scaled franchise, with strong market positions across various regions, businesses and customer segments. Wells Fargo has worked to simplify its business and has exited or reduced its exposure to a number of business lines over the last few years. The Company has recently made some key hires to further build out its commercial and investment banking businesses as well as investments in the credit card business including the roll out of a series of new credit card products.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Wells Fargo reported net income of $19.1 billion in 2023, an increase from the $13.7 billion earned in 2022. The higher year-over year earnings reflect an increase in both net interest and non-interest income and a drop in operating losses which lowered expenses partially offset by a higher provision for credit losses. Wells Fargo remains focused on simplifying the company and controlling expenses. In 2023, the Company has benefitted from higher interest rates which boosted NII and expanded the net interest margin. This boost in NII, combined with flat operating expenses, has led to improved profitability metrics which had previously lagged similarly rated peers. Returns for 2023 equated to a sound ROA of 1.02% and ROTCE of 13.1%. However, the Company’s efficiency ratio (67% for 2023) continues to lag many peers.

Risk Combined Building Block (BB) Assessment: Strong
Asset quality indicators remain sound with non-performing assets, nonaccrual loans and net charge-offs, while normalizing, remaining at manageable levels. Coverage of the loan portfolio at 1.61% of total loans remains sound, especially given current loss levels. The Company’s $30.5 billion commercial real estate office portfolio remains under pressure, but has a sizeable $2.4 billion allowance for credit losses for loans allocated to this asset class, representing 7.9% of total office loans. Morningstar DBRS 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. The Company continues to make progress resolving regulatory issues and has exited a number of regulatory Consent Orders. However, additional work is still needed to resolve the remaining regulatory agreements including the lifting of the asset cap.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong
Balance sheet trends remained favorable. Funding is considered robust. Indeed, the Company has a proven ability to 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. The Company reported a Liquidity Coverage Ratio of 126% for 1Q24, comfortably above the 100% regulatory minimum.

Capitalization Combined Building Block (BB) Assessment: Strong
Morningstar DBRS views Wells Fargo as having strong capital generation. Capital levels remain sound, with the Company reporting a CET1 ratio (standardized approach) of 11.19% as of March 31, 2024. Following the 2023 CCAR stress tests, In 2023, Wells Fargo’s stress capital buffer was reduced 30 bps to 2.9%, with a CET1 capital requirement of 8.9%. During 1Q24, Wells Fargo repurchases $6.1 billion of common stock on top of 2023’s repurchases of $12.0 billion.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/432977.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a relevant effect on the credit analysis.

Environmental € Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
The following Social factor(s) had a relevant effect on the credit analysis: Morningstar DBRS views the Social Impact of Product Governance ESG subfactor as relevant to the credit rating, but it does not affect the current assigned ratings or trends. Wells Fargo’s previous sales practices and other issues around product governance have led to regulatory issues, remediation costs and litigation exposure. Reflecting this, we have incorporated this in the Franchise Strength and Risk Profile grid grades.

Governance (G) Factors
The following Governance factor(s) had a relevant effect on the credit analysis: Morningstar DBRS views the Governance Impact of Corporate/ Transaction Governance ESG subfactor as relevant to the credit rating, but it does not affect the current assigned ratings or trends. Wells Fargo’s previous failures in corporate governance have exposed the Company to heightened litigation and conduct costs. This has been incorporated in the Franchise Strength and Risk Profile grid grades.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (15 April 2024) https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

These credit ratings are 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 credit ratings:

The last credit rating action on this issuer took place on May 18, 2023, when all ratings were confirmed.

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see: https://data.fca.org.uk/#/ceres/craStats

Lead Analyst: John Mackerey, Senior Vice President, Sector Lead, North American Financial Institution Ratings
Rating Committee Chair: Michael Driscoll, Managing Director, North American Financial Institution Ratings
Initial Rating Date: October 30, 1992

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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