Fitch: Wells Fargo 3Q'13 Results: Mortgage Revenues Decline As Expected, Net
Income Still Strong
CHICAGO -- October 11, 2013
Wells Fargo & Company (WFC) reported a still strong quarter with earnings
growth for 15 quarters in a row, despite a significant drop in mortgage
revenues. Offsetting the expected decline in refinancing activities, provision
expenses dropped to just $75 million, helping to support a still strong return
on average assets (ROA) of 1.53%.
As expected, mortgage banking revenues declined during the quarter given the
recent rise in long-term interest rates. Revenues were impacted by both lower
refinance volumes and reduced gain on sale margins. WFC's first mortgage
unclosed pipeline fell to just $35 billion, well below the level last quarter
and a year ago. As such, Fitch expects that mortgage revenues will likely
continue to decline over the near term.
Revenues fell 4% sequentially driven by the previously mentioned decline in
mortgage revenues, though excluding mortgage from both quarters, noninterest
income improved 4% on a sequential basis. WFC also reported lower trust and
investment fees, offset by a significant increase in gains from equity
investments, which tend to be a lumpy item for the company. Equity gains
during the first nine months of 2013 are up just $48 million as compared to
the same period last year. Spread income was flat, though the net interest
margin once again declined on a sequential basis due to the continued growth
in deposits which is dilutive to the margin. Expenses fell 1% sequentially due
to lower incentive compensation, somewhat offset by higher mortgage-related
Provision expenses totaled just 4bps of loans on an annualized basis, as
compared to quarterly NCOs at 48bps of average loans. As a result of the
reserve release for the quarter, reserves for loan losses declined to 1.87% of
loans. The improved housing market and improving asset quality performance
drove the higher sequential reserve release. WFC expects future reserve
releases, absent a significant deterioration in economic conditions. Fitch
notes that NCOs at this level are also likely not sustainable, with historical
losses more around the 100bps range.
As previously disclosed, WFC had reached an agreement with Freddie Mac to
resolve substantially all repurchase liabilities related to loans sold to
Freddie Mac prior to Jan. 1, 2009. The one-time cash payment of approximately
$780m was covered by existing reserves, and as such was neutral to earnings.
Fitch views the agreement favorably as it resolves the majority of
mortgage-related repurchase risk for WFC, in Fitch's view. The ending balance
of reserves totaled $1.42 billion or 109% of the original loan balance of
unresolved repurchase demands.
Tier 1 common under Basel III improved approximately 100bps to an estimated
9.54% at Sept. 30, 2013, and exceeded the company's internal target of 9%. WFC
attributed the improvement to improved risk weightings on BOLI assets, the
disposition of an asset with punitive risk-weighting, and model refinements
for commercial portfolios. Unlike last quarter, the movement in unrealized
securities gains did not materially impact capital ratios with unrealized
gains actually improving to $5.8 billion at Sept. 30, 2013 from $5.1 billion
at June 30, 2013, but still well below the $11.2 billion at March 31, 2013,
prior to recent rise in long-term interest rates. As an Advanced Approach
bank, WFC will be subject to fluctuations in AOCI under Basel III once it
comes into effect Jan. 1, 2014.
WFC's ratings were affirmed on October 8, 2013 reflecting the company's
superior earning profile, strong franchise, solid capital and liquidity
profiles, and improving asset quality. WFC's financial performance over the
past several years has been very solid despite a challenging economic and
interest rate environment. WFC continues to post very strong net income each
quarter, with return on assets (ROAs) well in excess of the large regional
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Julie Solar, +1-312-368-5472
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Chicago, IL 60602
Christopher Wolfe, +1-212-908-0771
Media Relations, New York
Brian Bertsch, +1-212-908-0549
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