WELLS FARGO & COMPANY
Fitch Ratings has affirmed
The Rating Outlook has been revised to Stable from Negative.
The revision of the Outlook to Stable reflects Fitch's view that WFC will maintain adequate financial performance to support the current rating despite the growth limitations associated with the asset cap as well as the operational and financial burden associated with remediation of regulatory orders.
Fitch has withdrawn the Support Ratings and Support Rating Floors of
Fitch has also withdrawn the Support Rating of
Key Rating Drivers
The affirmation reflects the group's diverse business model and strong retail banking franchise, backed by a solid capital position and robust liquidity profile.
Business Profile Supports Rating: Fitch has assigned WFC a Business Profile score of 'a+' which is in line with the current rating. While WFC's earnings power is currently inhibited by growth limitations associated with the asset cap, Fitch believes the core franchise and business model continue to be strengths that are supportive of the rating. WFC has the third-largest deposit franchise in the
Execution Progress: Following the management overhaul under current CEO
Execution against management's measurable expense targets through various efficiency initiatives have also been successful over the last year. The rating incorporates our assumption that this will persist going forward. Still, the longer than anticipated remediation timeframe associated with legacy governance issues constrain the overall rating and results in a Business Profile score of 'a+', adjusted below the 'aa' category score implied by Fitch's criteria.
Risk Profile a Constraint: Fitch still views WFC's overall Risk Profile as a rating weakness in light of the ongoing remediation efforts to rebuild and strengthen the risk controls and governance within the organization. Despite incremental progress as evidenced by the expiration of a sales-practices related
Good Credit and Market Risk Management: The affirmation reflects Fitch's view of WFC's good credit and market risk management cultures that, along with various central bank and federal government policy measures, have resulted in favorable asset quality performance as well as the avoidance of material missteps within its capital markets segment. Fitch observes that while nonperforming loan levels were higher than the peer group average as of 1Q22, they remain well-under the 3% of total loans threshold in Fitch criteria and realized credit losses have been nominal and lower than peers over the last year, a credit positive.
Earnings to Moderate from Strong 2021: Earnings benefited from a solid recovery in the economic environment during 2021 that drove reserve releases and strong fee generation which offset spread revenue pressures associated the low rate environment as well as asset growth limitations. This drove a recovery of operating profit/risk-weighted assets (RWA) to 2.33% for 2021 from only 0.34% in 2020. Looking ahead, Fitch expects WFC's spread revenue to recover in 2022 under the favorable interest rate climate, further aided by balance sheet remixing and management's mid-single-digit growth outlook for average loan balances (4Q22 vs 4Q21).
Fitch anticipates softer fee income generation from mortgage banking coupled with financial market volatility that would negatively impact wealth management revenues and privative equity and debt security gains. This, coupled with less potentially higher credit costs associated with the weakening economic outlook could drive WFC's operating profit/RWA below 1.5% (the benchmark threshold for an 'a'-category score) in 2022. Fitch expects this decline to be temporary and the rating incorporates our assumption that over the medium-to-longer term profitability will likely be sustained in the 'a-category'.
Earnings Score Lowered: Fitch lowered the Earnings and Profitability factor score by a single notch to 'a' to reflect recent relative earnings volatility as well as weaker performance under the asset cap. While WFCs earnings power has been and will continue to be adversely impacted by the asset cap, Fitch views the core earnings power of WFC's franchise as consistent with the assigned factor rating of 'a' over the medium-to-long term.
Capital Supports Rating: Strong capital measures continue to be supportive of WFC's rating and today's affirmation. Fitch observes that relative to WFC's large regional bank peers, the firm remains subject to both higher capital and liquidity requirements that provide an added layer of creditor protection and lend support to the current ratings. Incorporated into today's affirmation is Fitch's view that the firm's reported regulatory capital ratios will remain well-above its large regional peers while earnings pressures remain and regulatory overhangs persist.
The bank's reported benchmark common equity Tier 1 (CET1) ratio of 10.5% as of 1Q22 is still comfortably above regional bank peers. The ratio has declined approximately 130 bps over the past year due to the resumption of share repurchases and the impact of AOCI reduction in 1Q22. Fitch continues to view WFC's performance under annual regulatory stress testing somewhat favorably. However, with ongoing earnings challenges at the bank, its stress capital buffer increased in 2021 (to 3.1%) and management has indicated that it could increase again when the next round of CCAR results are made public in June. Management has indicated it will moderate share repurchases in 2022 to accommodate the maintenance of its capital buffer of 100-150bps above its regulatory minimum that stood at 9.1% as of 1Q22.
Robust Funding Profile: Supporting the affirmation is Fitch's view of WFC's funding and liquidity which remain robust. WFC's funding profile benefits from being primarily core deposit funded and has also sustained, good access to the capital markets and ample contingent forms of liquidity. Fitch notes that total deposit growth at the bank has meaningfully lagged both its similarly sized peers and
Government Support Ratings: WFC and WFBNA's assigned GSRs reflect Fitch's view that senior creditors cannot rely on receiving extraordinary support from the sovereign in the event that WFC becomes non-viable. In Fitch's view,
Shareholder Support Ratings: The SSR of 'a+' assigned to WFC's various domestic and international subsidiaries reflects Fitch's view that WFC's ability and propensity to support these entities is high and therefore Fitch has equalized their IDRs with WFC's IDR. Fitch views these entities as highly integrated and they play an important role in the group. The reputational risk associated with a default is also high for these entities.
Holding Company: WFC's VR is equalized with
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The rating incorporates our assumption that WFC will maintain solid capital buffers over statutory minimums while its core earnings remain challenged and regulatory overhang persists. As such, a decline in WFC's reported benchmark CET1 ratio below 10% without a credible plan to rebuild it above this threshold, could place negative pressure on the ratings.
Failure to report meaningful progress in remediating regulatory issues could drive negative ratings action, particularly since WFC remains highly-rated. The bank's rating would also be sensitive to disclosures of additional, meaningful regulatory orders outside of what has already been made public.
The successful execution of management's expense efficiency initiatives supports the rating while the asset cap remains outstanding. Evidence of significant shortcomings against management's expense targets could result in downward pressure on the ratings. WFC's fee generating businesses have been an important partial offset to the spread revenue growth challenges stemming from the asset cap. While market-related cyclicality and volatility in fee revenue is expected, evidence of structural deterioration in core fee-generating businesses' earnings power could also pressure the ratings, especially while the asset cap remains outstanding.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
With the revision of the Outlook back to Stable, Fitch does not see ratings upside over the near to medium-term. Over the longer term, ratings could be upgraded if WFC completes its overhaul of operational risk management and internal controls, and we view WFC's risk management infrastructure to be consistent with higher rated peers. This would assume the asset cap as well as most other regulatory orders are lifted in conjunction with the view that the firm's strong deposit franchise remains intact while at the same time generating consistent profitability.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Subordinated Debt: Subordinated debt issued by WFC is notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. WFC's subordinated debt rating reflects the baseline notching for loss severity of two notches from the VR. Fitch believes that the loss severity of subordinated debt of WFBNA is reduced by the presence of the holding company and TLAC and the approach Fitch expects authorities to take for resolution/restructuring. Therefore, Fitch has applied alternative notching to WFBNA's subordinated debt rating to one-notch from its VR. This reflects one notch for loss severity and no notches for non-performance.
Preferred Stock: WFC's preferred stock rating is four notches from the VR, encompassing two notches for non-performance and two notches for loss severity.
Long-and Short-Term Deposit Ratings: Fitch rates WFBNA's long-term deposits one notch higher than the Long-Term IDR and senior unsecured debt because
WFC's international banking subsidiary,
Derivative Counterparty Rating: The Derivative Counterparty Rating (DCR) of the parent company is equalized with the Long-Term IDR. The DCRs of WFC and WFBNA are equalized with the Long-Term IDRs of those entities because they have no definitive preferential status over other senior obligations in a resolution scenario, and therefore their ratings will move in line with their respective IDRs. These ratings have been assigned because they either have significant derivatives activity or are counterparties to Fitch-rated structured finance transactions.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Subordinated Debt and Preferred Stock: The ratings for WFC and its operating companies' subordinated debt and preferred stock are sensitive to any change to the VR;
Long- and Short-Term Deposit Ratings: The long-term deposit ratings is sensitive to any changes to WFBNA's Long-Term IDR. WFBNA's subsidiaries' short-term deposit rating is sensitive to the company's long-term deposit rating and Fitch's assessment of WFBNA's funding and liquidity profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Subordinated Debt and Preferred Stock: The ratings for WFC and its operating companies' subordinated debt and preferred stock are sensitive to any change to the VR;
Long- and Short-Term Deposit Ratings: The long-term deposit ratings is sensitive to any changes to WFBNA's Long-Term IDR. WFBNA's subsidiaries' short-term deposit rating is sensitive to the company's long-term deposit rating and Fitch's assessment of WFBNA's funding and liquidity profile.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
WFBNA IDRs Notched Up: The Long-Term IDRs and Short-Term IDRs of WFBNA, the material
Other Subsidiaries Equalized with Parent:
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Subsidiary Rating Sensitivities: WFBNA's ratings would be sensitive to any change in the group (WFC) VR. WFBNA's IDRs are also sensitive to the satisfaction of TLAC requirements. Other subsidiary ratings would be sensitive to the same factors that might drive a change in their parent (WFC) IDRs. They are also sensitive to our view of shareholder support flowing from WFC.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Subsidiary Rating Sensitivities: WFBNA's ratings would be sensitive to any change in the group (WFC) VR. WFBNA's IDRs are also sensitive to the satisfaction of TLAC requirements. Other subsidiary ratings would be sensitive to the same factors that might drive a change in their parent (WFC) IDRs. They are also sensitive to our view of shareholder support flowing from WFC.
VR ADJUSTMENTS
The assigned VR of 'a+' is in line with the implied VR.
The Business Profile score of 'a+' has been assigned below the 'aa-' category implied score due to the following reasons:
Management and governance: The firm still is operating under numerous regulatory consent orders and as a result, the adjustment incorporates relatively weaker corporate governance when compared to similarly sized and rated peers;
Historical and future developments: The franchise and business model are weakened by the impact of the asset cap.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
WFC and its rated subsidiaries have an ESG Relevance Score of '4' for Management Strategy due to the ongoing process of remediating various risk control issues and responding to regulatory findings, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
WFC and its rated subsidiaries have an ESG Relevance Score of '4' for Governance Structure due to WFC's ratings being lowered in
WFC and its rated subsidiaries have an ESG Relevance Score of '3' for Exposure to Social Impacts, which is higher than the sector default score of '2'. This reflects the potential for the shift in social or consumer preferences as a result of social and/or political disapproval of core banking practices stemming from legacy sales practice issues and its ongoing remediation.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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