Wells Fargo (WFC) reported revenue growth on both a linked-quarter basis and a year ago basis, due to spread income growth from higher earning assets. On a period-end basis, WFC reported subdued loan growth at less than 2% on an annualized basis. WFC reported growth primarily in credit cards, automobile, and CRE, partially offset by essentially flat C&I balances and continuing declining balances in junior liens.
Fitch says Wells Fargo reported $5.6 billion in net income, resulting in a return on assets (ROA) of 1.17%, and a return on equity (ROE) of 11.6%. Earnings increased 1.6% on a linked-quarter basis reflecting revenue growth and lower credit costs, partially offset by higher expenses, according to Fitch Ratings.
The current quarter’s performance was within the company’s currently targeted ranges for ROA of between 1.10% and 1.40% and ROE of between 11% and 14%, though remaining on the lower end of these ranges.
Fitch recently revised WFC’s Rating Outlook to Negative reflecting the potential damage to the firm’s franchise and earnings profile following recent regulatory actions regarding unauthorized account openings.
WFC provided various details on recent customer activity. It was disclosed that consumer and small business banking deposits grew modestly in September relative to August, but there was a 30% decline in consumer checking account openings in September relative to the prior month. WFC also disclosed that mortgage referrals from Retail Banking were down 24%, though Retail Banking referral account for a relatively small percentage of total mortgage originations at roughly 10%. Lastly, WFC also disclosed that Retail Brokerage advisory flows were higher in September as compared to August and a year ago.
Despite these somewhat offsetting trends, Fitch believes it is still too early to discern whether there has been any financial impact from the firm’s Sept. 8 settlement announcement related to the unauthorized account opening.
WFC recently announced the retirement of Chairman and CEO John Stumpf, effective immediately. Tim Sloan, the company’s President and COO, was named CEO. At the same time, Stephen Sanger, Lead Director, was named as the Board’s non-executive Chairman, while independent director Elizabeth Duke is now Vice Chair. Fitch views the appointment of Tim Sloan as CEO as in line with Fitch’s expectations and views the new separation between Chairman and CEO favorably from a corporate governance standpoint.
Turning to the quarterly results,
Deposit balances improved 2.4% with increases across most categories. Of note, deposit costs remained very low at 11bps during the quarter. Fitch will be monitoring deposit balances, along with account openings, primary consumer checking account customers, and wealth and investment management client assets for any declines that may be related to the unauthorized account openings.
WFC reported a decline in the net interest margin of 4bps to 2.82%. The compression is primarily attributed to continued issuance of long-term debt related to TLAC. With one rate hike of 25bps, WFC estimated $150 million in additional net interest income per quarter during the first year.
In terms of noninterest income, WFC reported higher deposit service charges, trust and investment fees, and mortgage banking revenues. This was offset by a drop in market-sensitive revenues. Despite a seasonally slower third quarter, WFC reported strong mortgage origination volume with $70 billion in originations, up from $63 billion last quarter and $55 billion a year ago. The bank reported a 3% increase in noninterest expenses, primarily attributed to higher operating losses, which includes litigation accruals and higher salary expenses. Quarterly noninterest expenses also reflect a $107m charitable contribution, and higher FDIC insurance expenses.
Credit quality remained strong with 33bps of loan losses during the quarter, with lower energy-related net charge-offs (NCOs) and continued strength in residential real estate and CRE. NCOs remain below the company’s through-the-cycle loss estimate of 65bps, and Fitch’s expectations of normalized credit losses. Provision expenses matched NCOs resulting in no reserve build or release.
Non-performing assets (NPAs) declined on a linked-quarter basis primarily due to lower consumer non-accrual balances. At Sept. 30, 2016, WFC’s direct exposure to energy lending declined to $16 billion or 1.7% of total loans outstanding. Oil and gas exposure also declined to $38.3 billion during the quarter due to borrowing base reductions. WFC reported lower NCOs, and reserves to energy outstandings at 8.7% at quarter-end, with the linked-quarter decline attributed to an improvement in industry conditions.
WFC issued approximately $9.2 billion in parent debt during the quarter in anticipation of the pending total loss absorbing capacity rule, offset by around $2.1 billion of debt that rolled into the maturing in less than one year bucket. Lastly, the estimated Common Equity Tier 1 under Basel III Standardized Approach, fully phased-in, was 10.7% at quarter-end, up 10bps the prior quarter, and above the company’s internal target of 10%.