Wells Fargo & Company (WFC) reported fourth quarter 2015 (4Q15) results
of $5.7 billion in net income for a return on assets (ROA) of 1.27%,
down 1.5% from last quarter. Earnings have remained relatively
consistent over the last five quarters, hovering at around the $5.7
Earnings during the quarter were supported by both spread income and
controlled expenses. This was partially offset by higher provision
expenses and a large drop in equity gains, which tend to be the most
volatile line item in WFC's earnings.
Fitch views these results as in line with expectations for WFC, one of
the strongest and most consistent earnings profiles in the industry. The
quarter's results were comparatively stronger than big banks reporting
to date given the U.S.-based focused franchise and absence of capital
At year-end 2015, WFC's direct exposure to energy lending is modest at
less than 2% of total loans. WFC reported $118 million in net
charge-offs (NCOs) or approximately 2.7% of energy balances on an
annualized basis in 4Q15, with $843 million of non-accrual balances. WFC
also reported one of the highest reserve coverage ratios yet at 7% of
oil and gas loans. The reserve was based on customer-by-customer
analysis, as well as the forward curve for oil prices, which are higher
than current prices of around $30.
WFC's balance of energy-related available-for-sale securities and
nonmarketable securities was $2.5 billion. During the quarter, WFC
realized $251 million in OTTI primarily reflecting marks on energy
sector debt and equity investments.
Spread income increased 1.4% on a linked-quarter basis, primarily
supported by growth in loans and securities, as well as higher variable
income. Core loan growth was 2% on a linked-quarter basis, while
securities balances grew 1%.
WFC's margin fell 4bps due to continued strong deposit growth, as well
as higher funding costs as WFC issued more long-term debt in preparation
for the previously announced GE capital deals. The GE Railcar Services
acquisition closed on Jan. 1, 2016, and it is anticipated that the
commercial distribution and vendor finance purchase will close in late
Noninterest income declined 4% primarily due to lower equity gains,
partially offset by improved gains on debt securities and trading.
Market-sensitive revenues, which include gains and losses on equity
investments, trading activities, and debt securities, combined with
investment banking fees, were around 6% of total revenues, and can be
volatile from quarter to quarter. However, this level of capital markets
revenues is well below WFC's large bank peers.
Expenses were flat on a sequential basis, primarily due to higher
personnel, equipment and outside professional services, offset by lower
operating losses and foreclosed real estate expenses. Furthermore, last
quarter included a charitable contribution to the Wells Fargo Foundation
that did not repeat. The full-year efficiency ratio was 57.8%, at the
higher end of its targeted 55% to 59% efficiency ratio. WFC expects to
operate at the higher end of that range in 2016.
For the second quarter in a row, WFC reported the absence of a reserve
release with provision expenses equaling NCOs. WFC attributed the lack
of a reserve release to continued improvement in residential real
estate, offset by deterioration in the energy sector.
Total loan losses ticked up 5bps to a still low 36bps during the quarter
due primarily to the previously mentioned energy-related loan losses.
Fitch notes that at 36bps, WFC's current losses remain well below
historical averages for the company, and we expect some mean reversion
for WFC and the industry over the near- to medium-term. Non-accrual
balances fell 4% on a linked-quarter basis reflecting broad improvement
across consumer and commercial loan categories, offset by energy-related
The estimated Common Equity Tier 1 under Basel III Standardized
Approach, fully phased-in, was 10.7% at quarter-end, up approximately
5bps on a linked-quarter basis. In terms of potential TLAC issuances,
WFC reaffirmed its estimate of between $40 billion to $60 billion in
issuance, which Fitch views as very achievable given an extended
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