DBRS Morningstar Confirms Wells Fargo & Company at AA (low); Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Wells Fargo & Company (Wells Fargo or the Company), including the Company’s Long-Term Issuer Rating of AA (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Wells Fargo Bank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
Reflecting the quality of its underlying franchise, Wells Fargo’s performance remains solid even as it continues to deal with the fallout originally stemming from the sales practices scandal that surfaced over three years ago, as well as other missteps. These issues have contributed to elevated regulatory, legal and compliance expenses as the Company continues to build out its risk management infrastructure and deal with the missteps, while managing the asset cap that was imposed in relation to the February 2018 Consent Order. Despite these headwinds, Wells Fargo has maintained strong market shares in its businesses, including continued momentum with new checking accounts and deposits. Positively, expense initiatives have been able to offset higher regulatory and compliance costs, resulting in still solid earnings performance. Moreover, DBRS Morningstar notes that the Company recently completed its CEO search with the hiring of Charlie Scharf. DBRS Morningstar views the addition of Scharf positively, given his successful prior track record, as well as the breadth and depth of his prior experience, including running another G-SIB financial institution.

RATING DRIVERS
DBRS Morningstar sees limited positive ratings drivers over the intermediate term given the Company’s outstanding operational, legal and regulatory issues. Conversely, negative ratings implications could arise from any new notable missteps, or if the Company’s ongoing regulatory and reputational issues lead to a sustained decline in profitability levels or a perceived impairment in the strength of the Company’s franchise. Additionally, a noted deficiency in risk management practices or a worse than peer deterioration in asset quality, especially as a result of weak underwriting or an increase in risk appetite, could have negative ratings implications.

RATING RATIONALE
Despite the impact of heightened litigation and remediation expenses, DBRS Morningstar considers Wells Fargo’s recent operating results as remaining sound with ample capacity to absorb these costs. Moreover, Wells Fargo still leads many of its large global banking peers in financial performance. The Company does have an expense and headcount reduction program in place and has been rationalizing its sizeable branch network and exiting non-core businesses, that has helped offset elevated expenses related regulatory, legal, and compliance expenses. While the Consent Order caps the size of Wells Fargo’s balance sheet at its size at YE17 (approximately $1.95 trillion based on a rolling two-quarter daily average), the Company has been effectively managing under this limit and does not currently see it impacting business growth or earnings.

Wells Fargo reported 3Q19 net income of $4.6 billion, down sharply both linked quarter and year-over-year (YoY) primarily reflecting the ongoing impact of the retail sales practices scandal, as well as the adverse impact of lower interest rates. Specifically, earnings were adversely affected by various matters, including $1.9 billion of operating losses, which included a $1.6 billion (not tax deductible) discrete litigation accrual for previously disclosed retail sales practices matters. Providing some offset, the Company reported a $1.1 billion (pre-tax) gain from the sale of the Institutional Retirement and Trust business. Despite the noise this quarter, earnings still equated to relatively sound 0.95% return on assets.

DBRS Morningstar continues to view asset quality and credit risk management as key strengths of the Company and an area where the Company is expected to outperform peers. Wells Fargo is able to react quickly to changing fundamentals in its loan portfolio and adjust underwriting accordingly. Reflecting the current benign credit environment, the Company has continued to report declining non-performing assets and low levels of net charge-offs.

Funding is considered robust. Indeed, the Company has a proven ability to grow and fund its balance sheet with deposits. Additionally, Wells Fargo has ready access to wholesale funding in a variety of markets. Given its balance sheet and business mix, Wells Fargo is less reliant on market-based funding sources than some of its peers. Indeed, short-term borrowings represented $123.9 billion, or just 6% of total assets as of September 30, 2019. The Company is compliant with domestic Basel III liquidity coverage ratio rules and reported an average liquidity coverage ratio of 121% for 2Q19.

DBRS Morningstar views the Company’s capital position as sound. Capital levels have remained relatively stable and above Wells Fargo’s 10% target with an estimated Basel III Common Equity Tier 1 (CET1) ratio of 11.6% at September 30, 2019. The Company received a non-objection from the Federal Reserve for its 2019 capital plan, which includes sizeable gross buybacks of up to $23.1 billion (for the four-quarter period 3Q19-2Q20), as well as a 13% increase in the common stock dividend in the 3Q19. Most recently, Wells Fargo returned approximately $9.0 billion to shareholders in 3Q19. With estimated total loss absorbing capacity (TLAC) of 23.3% at 3Q19, the Company exceeds the TLAC required minimum of 22%, which became effective on January 1, 2019.

Headquartered in San Francisco, Wells Fargo & Company, a financial holding company, reported $1.94 trillion in assets as of September 30, 2019.

The Grid Summary Grades for Wells Fargo are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Very Strong/Strong.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2019), DBRS Criteria: Guarantees and Other Forms of Support (January 2019), DBRS Criteria: Rating Principal Protected Market-Linked Securities (March 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was utilized to evaluate the Issuer, “DBRS Criteria: Guarantees and Other Forms of Support” was used to rate subsidiaries guaranteed by the Issuer and “DBRS Criteria: Rating Principal Protected Market-Linked Securities” was used to rate select issuances of these types of securities.

The last rating action on this issuer took place on September 26, 2018, when all ratings were confirmed with a Stable trend.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: John Mackerey, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: 10 December 1999

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