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 long-term ratings at the Company and all ratings at the Bank have been revised to Stable from Negative. 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
The trend change to Stable from Negative recognizes the progress Wells Fargo has made resolving regulatory issues, while improving its risk management framework. Moreover, despite inflationary pressures, the Company expects expenses to remain relatively flat.
The ratings confirmation reflects the scale, quality and diversity of Wells Fargo’s franchise. Moreover, the strong balance sheet provides support for the ratings, including a robust deposit base, sound asset quality and solid capital. The ratings also consider the weaker than peer financial metrics with the expectations that earnings and operating efficiency should improve with higher interest rates which should boost net interest income.
The Company is still required to manage under an asset cap that was imposed as part of the February 2018 regulatory Consent Order. This order stemmed from the sales practices scandal and other missteps that first surfaced almost six years ago. We had anticipated that the asset cap would have been lifted by now, which would have helped alleviate revenue and expense pressures. The Company continues to rebuild its risk management infrastructure while absorbing litigation and other conduct costs. This has been offset by lower expenses in other parts of the business.
Given Wells Fargo’s remaining regulatory issues, a ratings upgrade is unlikely. Ratings would be downgraded if there were a sustained deterioration in asset quality, especially if caused by deficiencies in credit risk management. Additionally, a prolonged deterioration in profitability metrics would also result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong
Headquartered in San Francisco, Wells Fargo & Company, a financial holding company, reported $1.94 trillion in assets as of March 31, 2022. Wells Fargo’s franchise strength stems from its highly diversified and scaled franchise, with strong market positions across various regions, businesses and customer segments.
Earnings Combined Building Block (BB) Assessment: Strong / Good
Wells Fargo reported net income of $3.7 billion in 1Q22, a drop from the $4.6 billion earned in 1Q21. The lower year-over year earnings reflected a smaller reserve release and a drop in revenues partially offset by a slight decline in expenses. Wells Fargo remains focused on simplifying the company and controlling expenses. The Company is likely to benefit from higher interest rates which will help boost net interest income (NII) and expand the net interest margin. This boost in NII, combined with flat operating expenses, should lead to improved profitability metrics which have lagged similarly rated peers in recent periods.
Risk Combined Building Block (BB) Assessment: Strong / Good
Asset quality indicators remain sound with non-performing assets, nonaccrual loans and net charge-offs declining and remaining at very low levels. Despite the reserve releases, coverage of the loan portfolio at 1.26% of total loans remains sound, especially given current loss levels. DBRS Morningstar continues to view asset quality and credit risk management as key strengths for Wells Fargo and an area where the Company has historically outperformed peers. The Company continues to make progress resolving regulatory issues and has exited a number of regulatory Consent Orders. However, additional work is still needed to resolve the remaining regulatory agreements leading to the lifting of the asset cap.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong
Balance sheet trends remained favorable. 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.
Capitalization Combined Building Block (BB) Assessment: Strong
Capital levels remain sound, with the Company reporting a CET1 ratio (standardized approach) of 10.45% as of March 31, 2022, down 90 basis points linked quarter. Since 3Q21, Wells Fargo returned $20.9 billion of capital to shareholders through repurchases ($18.3 billion) and common stock dividends. DBRS Morningstar views Wells Fargo as having strong capital generation.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397208.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations,
DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022): https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support,
DBRS Morningstar Global Criteria: Rating Principal-Protected Market-Linked Securities (February 11, 2022): https://www.dbrsmorningstar.com/research/392302/dbrs-morningstar-global-criteria-rating-principal-protected-market-linked-securities.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents 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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. 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 (July 19, 2021) was used to evaluate the Issuer, DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022) was utilized to rate subsidiaries guaranteed by the Issuer, DBRS Morningstar Criteria: Rating Principal-Protected Market-Linked Securities (February 11, 2022) was used to rate select issuances of these types of securities, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) was used to analyze any ESG implications on the ratings.
The last rating action on this issuer took place on May 24, 2021 when all ratings were confirmed.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: John Mackerey, Senior Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director – Head of NA FIG
Initial Rating Date: December 10, 1999
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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