Fitch: Wells Fargo 4Q'13 Results: Net Income Remains Strong

Tue Jan 14, 2014 5:14pm EST

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(The following statement was released by the rating agency) NEW YORK, January 14 (Fitch) Wells Fargo & Company (WFC) reported another quarter of record earnings despite a relatively weak economic recovery and challenging interest rate environment. Earnings ticked up slightly, buoyed by both modest revenue growth and controlled expenses, resulting in a solid return on average assets (ROA) of 1.47%. Fitch views the results favorably as WFC appears to have been able to react nimbly to the changing mortgage refinancing market. WFC's credit profile also benefits from continuing improvement in asset quality, and unlike some of its large bank peers, WFC has reported relatively manageable litigation-related charges to date. Revenues were up slightly (1%) on both higher spread income and improved noninterest income. WFC reported decent sequential loan growth with loans increasing 7% on an annualized basis from the prior quarter, with broad-based growth across many asset classes. Fitch expects this level of loan growth will surpass peer averages. The net interest margin (NIM) continued to contract a further 12bps in 4Q'13, reflecting both deposit growth and liquidity-related actions taken last quarter by WFC. Mortgage results were relatively resilient in 4Q'13. While mortgage originations declined by nearly 40%, mortgage banking noninterest income fell only 2% from the prior quarter. Servicing income increased by roughly 40% due primarily to a write-up in the valuation of the mortgage servicing rights (MSR) asset in light of higher mortgage interest rates. Offsetting this, gain on sale revenue fell 22%, reflecting lower origination volumes. Offsetting the decline in mortgage revenues, WFC reported stronger trust and investment fees, up 6% on a linked-quarter basis. Expenses were flat sequentially. Lower staffing costs in mortgage were offset by higher equipment expenses reflecting annual license renewals. WFC also reported higher outside professional services expenses related to compliance and regulatory-related initiatives. WFC reported a smaller reserve release on a sequential basis of $600 million as compared to $900 million last quarter. Net charge-offs (NCOs) remained very manageable at just 47bps of average loans during the quarter supported by lower consumer losses. Provision expenses increased to $363 million during the quarter, up from just $75 million last quarter, marking the first increase in quarterly provision expenses for the year. WFC expects future reserve releases, absent a significant deterioration in economic conditions. Fitch notes that NCOs at this level are likely not sustainable, with historical losses more around the 100bps range. As previously disclosed, WFC has now reached agreements with both Fannie Mae and Freddie Mac resolving substantially all repurchase liabilities related to loans sold prior to Jan. 1, 2009. Fitch viewed these agreements favorably as they resolve the majority of mortgage-related repurchase risk for WFC. Existing and any future repurchase requests would stem from loans sold to the GSEs outside of the covered periods, as well as to private investors. The ending balance of reserves totaled approximately $900 million or 127% of the original loan balance of unresolved repurchase demands as of Dec. 31, 2013. Tier 1 common under Basel III improved by approximately 22bps to an estimated 9.78% at Dec. 31, 2013, and exceeded the company's internal target of 9%. Fitch views WFC as well-positioned for Basel III capital guidelines. Net unrealized securities gains totaled $3.9 billion at year-end 2013, down from $5.8 billion at Sept. 30, 2013, primarily driven by an increase in interest rates during the quarter. As an Advanced Approach bank, WFC will be ultimately be subject to fluctuations in AOCI under Basel III.. Contact: Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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