Jan 11 - Wells Fargo & Company (WFC) once again reported a record quarter
with net income of $5.1 billion for the fourth quarter 2012 (4Q'12) for a strong
ROA of 1.46%, according to Fitch Ratings.
Results included three one-time items during the quarter. First, WFC reported
$644 million in pre-tax charges stemming from the settlement agreement with
regulators, which immediately ends the independent foreclosure review programs
required as part of the April 2011 consent orders. WFC, in addition to nine
other mortgage servicers, participated in the settlement, which brings to an end
individual loan file reviews. Also impacting results, WFC contributed $250
million to the Wells Fargo Foundation during the quarter. Lastly, WFC realized a
$332 million tax benefit associated with a previously written-down Wachovia life
Strong deposit inflows continue to pressure the net interest margin (NIM), which
was down 10bps during the quarter, following a much steeper decline of 25bps in
3Q'12. The company took in a significant $51 billion in deposits in 4Q'12 and
over $20 billion of deposits in the third quarter. During these quarters,
period-end loans were up just $17 million and $7 million, respectively. Without
attractive higher-yielding investment opportunities, this excess liquidity
compressed the margin (8bps of the 10bps compression in 4Q'12 alone).
Positively, WFC continues to report further declines in deposit costs to just
16bps in 4Q'12.
Similar to last quarter, WFC again retained approximately $10 billion of 1 - 4
family conforming mortgage production, somewhat dampening the contribution from
mortgage banking by forgoing around $340 million in additional mortgage
revenues. Absent the retention of these mortgages in both quarters, core loan
growth was stronger during the quarter, up 3% on a sequential basis versus
essentially no growth last quarter, and helped to keep spread income flat on a
Noninterest income was positively impacted by strong gains from equity
investments, including the gain on the sale of Becker Underwood. These gains
helped to offset weaker trading and losses on debt securities. Revenues were
also aided by solid growth in investment banking and retail brokerage
asset-based fees and mortgage banking. Mortgage originations, applications, and
the pipeline all declined during the quarter, but remain strong. Fitch
nonetheless expects mortgage activity to slow, and the contribution of mortgage
banking to WFC's earnings to lessen over time.
Excluding the foreclosure review settlement charge and charitable contribution,
core expenses were approximately $12 billion, slightly down from last quarter.
Positively, there were no surprises in mortgage repurchase expenses, with the
pipeline and mortgage repurchase provision expenses lower for the quarter.
Reserve coverage of unresolved claims improved to approximately 113% at YE2012.
Fitch continues to expect that provisions for mortgage loan repurchase losses
will remain a modest drag on earnings performance over coming periods.
Asset quality improvement slowed during the quarter. Excluding the noise related
to the OCC guidance that went into effect last quarter, core net charge-offs
were $1.8 billion during the quarter, roughly flat from last quarter. Provision
expenses were up on a linked-quarter basis, the first time in three quarters.
Excluding the NCOs related to the OCC guidance, there was no release reserve in
4Q'12, per Fitch's calculations, as provision expense of $1.8 billion exceeded
adjusted NCOs. Nonetheless, this is in line with Fitch's expectations for
dwindling reserve releases for the industry.
Capital ratios continue to be augmented through earnings generation. WFC's
estimated Tier 1 common ratio under Basel III improved to 8.2% up from 8.0% at