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 are 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
The ratings confirmation and Stable trends reflect 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 Company’s operating results have shown improvement as higher rates have boosted net interest income (NII) while expenses outside of operating losses have been relatively flat.
The ratings also consider the progress Wells Fargo has made resolving legacy regulatory issues and improving its risk management framework, while absorbing elevated litigation and other conduct costs. 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 in September 2016.
Given Wells Fargo’s high rating level and remaining regulatory issues, a ratings upgrade is unlikely. Ratings would be downgraded if there were a sustained or outsized 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, a financial holding company, reported $1.89 trillion in assets as of March 31, 2023. 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 $5.0 billion in 1Q23, an increase from the $3.8 billion earned in 1Q22. The higher year-over year earnings reflect sharply higher net interest income, a drop in expenses partially offset by a higher provision for credit losses. Wells Fargo remains focused on simplifying the company and controlling expenses. The Company has benefitted from higher interest rates which boosted NII and expanded the net interest margin. This boost in NII, combined with flat operating expenses, has led to improved profitability metrics which have previously lagged similarly rated peers.
Risk Combined Building Block (BB) Assessment: Strong
Asset quality indicators remain sound with non-performing assets, nonaccrual loans and net charge-offs remaining at very low levels. Coverage of the loan portfolio at 1.45% 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. The Company reported a Liquidity Coverage Ratio of 122% for 1Q23, comfortably above the 100% regulatory minimum.
Capitalization Combined Building Block (BB) Assessment: Strong
Capital levels remain sound, with the Company reporting a CET1 ratio (standardized approach) of 10.8% as of March 31, 2023, up 20 basis points linked quarter. During 1Q23, Wells Fargo returned $4.0 billion of capital to shareholders through repurchases. 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/414180.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar views the Social Impact of Product Governance ESG subfactor as relevant to the credit rating, but it does not affect the current assigned ratings or trends. Wells Fargo’s previous sales practices and other issues around product governance have led to regulatory issues, remediation costs and litigation exposure. Reflecting this, we have incorporated this in the Franchise Strength and Risk grid grades.
Governance (G) Factors
DBRS Morningstar views the Governance Impact of Corporate/ Transaction Governance ESG subfactor as relevant to the credit rating, but it does not affect the current assigned ratings or trends. Wells Fargo’s previous failures in corporate governance have exposed the Company to heightened litigation and conduct costs. This has been incorporated in the Franchise Strength grid grade.
There were no Environmental factors that had a significant or relevant effect on the credit analysis.
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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
DBRS Morningstar notes that this Press Release was amended on November 9, 2023 to update the Notes section to coincide with the template in use at that time and to repair the embedded methodology linkages.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is Global Methodology for Rating Banks and Banking Organizations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
The following methodologies have also been applied, DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support (March 28, 2023). DBRS Morningstar Global Criteria: Rating Principal-Protected Market-Linked Securities (November 21, 2022): https://www.dbrsmorningstar.com/research/405565/dbrs-morningstar-global-criteria-rating-principal-protected-market-linked-securities
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar did have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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:
The last rating action on this issuer took place on May 23, 2022, when all ratings were confirmed.
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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
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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