How strong was Norwest's 1997 earnings growth and what drove it?

Net income rose 17.1% to a record $1,351.0 million. Growth came from a 9.2% increase in tax-equivalent net interest income, driven by a 7.0% rise in average earning assets and an 11 basis point improvement in net interest margin to 5.74%. Non-interest income increased 15.5%, led by mortgage banking, trust, insurance and fee-based revenues, along with $190.9 million of venture capital gains. These gains were partly offset by a higher provision for credit losses and rising non-interest expenses, which increased 8.1%, largely due to acquisitions.

Is credit quality deteriorating, and why does it matter?

Credit costs increased notably. Net charge-offs were $499.7 million, or 1.23% of average loans, up from 0.99% in 1996. Norwest Financial's charge-off ratio rose to 3.72%, and Norwest Card Services' rose to 5.23%. Part of the increase reflects the subprime auto lender Fidelity Acceptance, acquired in 1997. Non-performing assets remain low at 0.4% of total assets, and the allowance for credit losses covers 2.90% of loans. Investors should monitor consumer credit trends, since consumer lending is the company's largest source of growth and risk.

How much capital does Norwest hold, and is it sufficient for growth and acquisitions?

At year-end 1997, the Tier 1 risk-based capital ratio was 9.09%, the total capital ratio was 11.01%, and the leverage ratio was 6.63%. All of these exceed the regulatory minimums, and all banking subsidiaries were classified as well capitalized. Common equity grew to $6.8 billion, and the internal capital growth rate was 13.74%. The company also repurchased shares for acquisitions and benefit plans, and the board authorized purchases of up to 11 million shares, with 7.9 million remaining at year-end.

What are the main interest rate and acquisition risks?

The company is slightly asset-sensitive to rising rates. A 100 basis point increase would reduce net income by about $18 million over 12 months, while a 100 basis point decrease would add about $6 million. The one-year cumulative gap was negative $4.8 billion, or -5.6% of assets. Acquisitions are a regular growth strategy: six deals with about $483.9 million in total assets were pending at year-end and are expected to close in 1998. Interstate expansion is governed by Reigle-Neal Act rules, deposit concentration limits, and regulatory approval requirements.

WFC 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 1998. Cited figures are marked; the original filing is the authoritative source.

Norwest Corporation (the filing names it as the registrant, reported under the WFC/MN ticker in this request) reported record 1997 net income of $1,351.0 million^a, up 17.1% from $1,153.9 million in 1996, with diluted EPS of $1.75 (up 13.6%) and return on realized common equity of 22.1%.

Growth was driven by a 9.2% increase in tax-equivalent net interest income, a 15.5% rise in non-interest income (led by mortgage banking, trust, insurance and venture capital gains), and disciplined balance sheet expansion. Total assets reached $88.5 billion^b at year-end, and the company maintained strong capital, with a Tier 1 risk-based ratio of 9.09%, total capital of 11.01%, and a 6.63% leverage ratio, all banking subsidiaries rated well capitalized. The company's franchise breadth is a central theme.

Norwest Mortgage is the largest U.S. mortgage banker by originations ($55.3 billion^c funded in 1997) and servicing ($205.8 billion portfolio). Norwest Financial, the consumer finance arm, operates through 1,447 stores across North America and the Caribbean, and it absorbed the Fidelity Acceptance subprime auto lender in 1997. Consumer credit quality is the key watch item: net charge-offs rose to 1.23% of average loans from 0.99% in 1996, the provision for credit losses increased 32.9% to $524.7 million, and Norwest Financial's charge-off ratio reached 3.72%.

Non-performing assets remained modest at 0.4% of total assets. Management's outlook points to continued acquisition-driven growth, with six pending deals expected to close in 1998, and a Year 2000 remediation budget of $100 to $125 million^d over 1997 to 1999.

Interest rate risk is modestly asymmetric, with a 100 basis point rate rise projected to reduce net income by about $18 million. Investors should weigh the strong earnings momentum and capital position against rising consumer credit costs and the reliance on acquisitions and fee income.

02—Key points

Key Highlights

Record 1997 net income of $1,351.0 million, up 17.1%; diluted EPS of $1.75, up 13.6% (after the two-for-one stock split in October 1997)
Return on realized common equity of 22.1% and return on assets of 1.63%, both improved or stable versus 1996
Non-interest income rose 15.5% to $2,962.3 million, now 42.1% of tax-equivalent net revenues, with venture capital gains of $190.9 million and mortgage banking revenue of $875.5 million
Norwest Mortgage is the largest U.S. mortgage banker, funding $55.3 billion in 1997 and servicing a $205.8 billion portfolio
Consumer credit deterioration: net charge-offs rose to 1.23% of average loans (from 0.99%), and the provision for credit losses increased 32.9% to $524.7 million
Capital remained strong, with a Tier 1 risk-based ratio of 9.09%, a total capital ratio of 11.01%, and a leverage ratio of 6.63%; all banking subsidiaries were well capitalized
Total assets grew 10.4% to $88.5 billion, and the Year 2000 compliance program is budgeted at $100 to $125 million over 1997 to 1999

03—Questions

Frequently Asked Questions

How strong was Norwest's 1997 earnings growth and what drove it?
Net income rose 17.1% to a record $1,351.0 million. Growth came from a 9.2% increase in tax-equivalent net interest income, driven by a 7.0% rise in average earning assets and an 11 basis point improvement in net interest margin to 5.74%. Non-interest income increased 15.5%, led by mortgage banking, trust, insurance and fee-based revenues, along with $190.9 million of venture capital gains. These gains were partly offset by a higher provision for credit losses and rising non-interest expenses, which increased 8.1%, largely due to acquisitions.
Is credit quality deteriorating, and why does it matter?
Credit costs increased notably. Net charge-offs were $499.7 million, or 1.23% of average loans, up from 0.99% in 1996. Norwest Financial's charge-off ratio rose to 3.72%, and Norwest Card Services' rose to 5.23%. Part of the increase reflects the subprime auto lender Fidelity Acceptance, acquired in 1997. Non-performing assets remain low at 0.4% of total assets, and the allowance for credit losses covers 2.90% of loans. Investors should monitor consumer credit trends, since consumer lending is the company's largest source of growth and risk.
How much capital does Norwest hold, and is it sufficient for growth and acquisitions?
At year-end 1997, the Tier 1 risk-based capital ratio was 9.09%, the total capital ratio was 11.01%, and the leverage ratio was 6.63%. All of these exceed the regulatory minimums, and all banking subsidiaries were classified as well capitalized. Common equity grew to $6.8 billion, and the internal capital growth rate was 13.74%. The company also repurchased shares for acquisitions and benefit plans, and the board authorized purchases of up to 11 million shares, with 7.9 million remaining at year-end.
What are the main interest rate and acquisition risks?
The company is slightly asset-sensitive to rising rates. A 100 basis point increase would reduce net income by about $18 million over 12 months, while a 100 basis point decrease would add about $6 million. The one-year cumulative gap was negative $4.8 billion, or -5.6% of assets. Acquisitions are a regular growth strategy: six deals with about $483.9 million in total assets were pending at year-end and are expected to close in 1998. Interstate expansion is governed by Reigle-Neal Act rules, deposit concentration limits, and regulatory approval requirements.

04—Continue

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