01—Abstract
Summary
Summary of the 10-K filed February 24, 2016. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo's 2015 Form 10-K (filed February 24, 2016) reports a franchise that remained highly profitable and well capitalized, though growth was modest.
Net income was $22.9 billiona ($4.12 diluted EPS, a record), essentially flat versus $23.1 billion in 2014, with revenue up 2% to $86.1 billion. Net interest income rose 4% to $45.3 billion, while the net interest margin compressed to 2.95% from 3.11%, reflecting deposit growth that was deployed into lower-yielding liquid assets. Noninterest income was stable at $40.8 billion, and noninterest expense rose 2% to $50.0 billion, leaving the efficiency ratio at 58.1%.
Credit quality continued to improve, with net charge-offs falling to 0.33% of average loans and nonperforming assets declining for 13 consecutive quarters. However, the filing flags emerging stress in the oil and gas portfolio (under 2% of loans, roughly $1.2 billionb of allowance allocated to it), which drove a commercial allowance build and could worsen if oil prices stay low. The provision for credit losses rose to $2.4 billion from $1.4 billion, and the company recorded smaller allowance releases ($450 million versus $1.6 billion a year earlier).
Operating losses rose 50% to $1.9 billionc, including litigation accruals, and a $1.2 billion FHA settlement was agreed in principle after year-end. Capital strength is a central investor takeaway: the Common Equity Tier 1 ratio (fully phased-in, Standardized Approach) reached 10.77%, up from 10.43%, and the company returned $12.6 billion to shareholders through dividends and net buybacks.
Total assets reached $1.8 trilliond, loans grew 6% to $917 billion, and deposits grew 5% to $1.2 trillion. The company also disclosed pending GE Capital commercial finance acquisitions (about $31 billion in assets) and remains a G-SIB subject to a surcharge that the FRB estimated at 2.0%, with a long-term CET1 target of at least 10%.
02—Key points
Key Highlights
- Record diluted EPS of $4.12 on net income of $22.9 billion; revenue up 2% to $86.1 billion, with net interest income up 4% to $45.3 billion.
- Net interest margin compressed 16 basis points to 2.95% as deposit growth funded liquid, lower-yielding assets; efficiency ratio stable at 58.1%.
- Net charge-offs improved to 0.33% of average loans, and nonperforming assets fell 17% to $12.8 billion, though the provision rose to $2.4 billion as allowance releases shrank.
- Oil and gas exposure is a watch item: nonaccrual oil and gas loans rose to $844 million, and about $1.2 billion of the allowance is allocated to the portfolio.
- CET1 ratio (fully phased-in) rose to 10.77% and the company returned $12.6 billion to shareholders, with a $0.375 quarterly dividend and 163.4 million shares repurchased.
- Pending GE Capital Commercial Distribution Finance and Vendor Finance acquisition (about $31 billion of assets) is expected to close in phases in 2016; GE Railcar Services closed January 1, 2016.
- Operating losses rose 50% to $1.9 billion on litigation, and a $1.2 billion FHA lending settlement was agreed in principle with the Federal Government after year-end.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 24, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Interest Expense | $3.98B$4.03B | −1.2% |
| Net Income | $22.89B$23.06B | −0.7% |
| EPS (Basic) | $4.18$4.17 | +0.2% |
| EPS (Diluted) | $4.12$4.10 | +0.5% |
| Shares Outstanding (Basic) | 5.14B5.24B | −1.9% |
| Shares Outstanding (Diluted) | 5.21B5.32B | −2.2% |
05—Questions
Frequently Asked Questions
How profitable was Wells Fargo in 2015 and what drove earnings?
Net income was $22.9 billion, or $4.12 per diluted share, roughly flat with 2014's $23.1 billion but a record EPS figure thanks to share count reductions. Revenue grew 2%, driven by a $1.8 billion increase in net interest income from loan and securities growth. Higher provisions ($1.0 billion more) and noninterest expense ($937 million more, including litigation-related operating losses) offset that gain.
Is the net interest margin under pressure, and why?
Yes. The net interest margin fell to 2.95% from 3.11% in 2014 and 3.40% in 2013. Management attributes the decline mainly to customer-driven deposit growth that was invested in lower-yielding cash and short-term investments, plus higher long-term debt balances. Net interest income still grew because of loan and securities growth, but the margin trend is a key sensitivity for investors if rates stay low.
How strong is the balance sheet and capital position?
Assets were $1.8 trillion, loans $917 billion, and deposits $1.2 trillion. The CET1 ratio under the fully phased-in Standardized Approach was 10.77%, above the 9.0% minimum including the estimated 2.0% G-SIB surcharge, and management targets at least 10% long term. The supplementary leverage ratio was 7.7%, well above the 5% requirement that takes effect in 2018.
What are the main credit risks investors should monitor?
Consumer and residential real estate credit improved markedly, with consumer nonaccrual loans down to $9.0 billion. The main risks flagged are the oil and gas portfolio (under 2% of loans, with a rising nonaccrual balance), commercial real estate concentration (16% of loans, concentrated in California, Texas, New York and Florida), and the Pick-a-Pay option ARM portfolio's future payment recasts, with $1.8 billion of recast exposure through 2020.
What regulatory and legal exposures could affect future results?
Wells Fargo is a G-SIB subject to enhanced capital, liquidity and stress-testing rules, and it faces ongoing Dodd-Frank implementation, the Volcker Rule compliance deadline (July 2016), a proposed FDIC deposit insurance surcharge, and TLAC proposals that could require additional long-term debt. Legal matters include the FHA insurance litigation (a $1.2 billion agreement in principle) and interchange and debit-card posting class actions. Management says the high end of reasonably possible losses exceeds reserves by about $1.3 billion.
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