01—Abstract
Summary
Summary of the 10-K filed March 1, 2017. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo closed 2016 as the third-largest U.S. bank holding company by assets, with $1.9 trilliona in assets, $968 billion in loans, $1.3 trillion in deposits and $200 billion of equity.
Net income was $21.9 billionb, or $3.99 diluted EPS, down from $4.12 in 2015 as higher net interest income was offset by a $1.3 billion increase in credit provisions and a $2.4 billion rise in noninterest expense. Revenue grew 3% to $88.3 billion, and net interest income rose to 54% of revenue, reflecting loan growth that included $27.9 billion of commercial loans and leases acquired from GE Capital. Credit quality was stable, with net charge-offs of 0.37% of average loans, although oil and gas losses drove a $250 million reserve build.
Capital remained strong, with a 10.77% fully phased-in Common Equity Tier 1 ratio, and the company returned $12.5 billionc to shareholders. The dominant investor issue is the retail banking sales practices matter, which led to September 2016 settlements with the CFPB, OCC and Los Angeles City Attorney. The company has launched remediation, eliminated product sales goals, and faces ongoing investigations, lawsuits and possible further costs.
Fitch, S&P and DBRS revised their outlooks to negative in the fourth quarter. The Federal Reserve and FDIC also identified deficiencies in the 2015 resolution plan, and the company must file a revised submission by March 31, 2017. Until those deficiencies are remedied, the company faces restrictions on foreign and nonbank acquisitions and on the size of nonbank and broker-dealer assets.
Looking ahead, management expects the efficiency ratio to stay elevated, the share count to keep declining through buybacks, and the net interest margin to face pressure from funding costs. The company is also preparing for new rules, including CECL, lease accounting and TLAC requirements, which will require additional long-term debt issuance.
02—Key points
Key Highlights
- Net income of $21.9 billion ($3.99 diluted EPS), down 4% from $22.9 billion in 2015, with revenue up 3% to $88.3 billion.
- Net interest income rose 5% to $47.8 billion, while net interest margin declined 9 basis points to 2.86% due to funding costs.
- Retail sales practices settlements (CFPB, OCC, LA City Attorney) in September 2016 drove remediation, ongoing investigations, and negative rating outlooks from Fitch, S&P and DBRS.
- Credit quality held steady with net charge-offs of 0.37% of average loans, but the oil and gas portfolio drove a $250 million reserve build and $2.4 billion of oil and gas nonaccrual loans.
- Fully phased-in CET1 ratio of 10.77% (Standardized Approach); $12.5 billion returned to shareholders through dividends and net buybacks, with the quarterly dividend raised to $0.38.
- Regulators found two deficiencies in the 2015 resolution plan; a revised submission is due March 31, 2017, and nonbank and broker-dealer asset growth is restricted until the deficiencies are remedied.
- Efficiency ratio rose to 59.3% and noninterest expense increased 5% to $52.4 billion, driven by personnel, outside services and FDIC assessments.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed March 1, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $88.27B— | — |
| Interest Expense | $5.91B$3.98B | +48.6% |
| Net Income | $21.94B$22.89B | −4.2% |
| EPS (Basic) | $4.03$4.18 | −3.6% |
| EPS (Diluted) | $3.99$4.12 | −3.2% |
| Shares Outstanding (Basic) | 5.05B5.14B | −1.6% |
| Shares Outstanding (Diluted) | 5.11B5.21B | −1.9% |
05—Questions
Frequently Asked Questions
How did Wells Fargo's profitability change in 2016?
Net income fell 4% to $21.9 billion and diluted EPS fell to $3.99 from $4.12. Higher net interest income of $2.5 billion was offset by a $1.3 billion increase in provisions for credit losses and a $2.4 billion increase in noninterest expense. Return on assets fell to 1.16% from 1.31%, and return on equity fell to 11.49% from 12.60%.
What is the main risk from the sales practices matter?
The company is subject to investigations by several federal and state agencies, along with consumer, securities and employment lawsuits. Regulators could impose monetary penalties, restrict business activities or products, or limit capital distributions. The company says it cannot yet determine whether the outcome will have a material adverse effect on its financial condition. The reputational impact could also cost customers and team members.
Is the dividend and buyback program at risk?
The company raised its quarterly dividend to $0.38 and repurchased 159.6 million shares in 2016. It has authority to repurchase about 267 million more shares, and forward repurchase contracts are in place for 2017. However, the Federal Reserve must approve capital distributions under the capital plan rule, and the resolution plan deficiencies could lead to tighter capital or liquidity requirements.
How strong is the balance sheet and capital position?
Total equity reached $200.5 billion. The fully phased-in CET1 ratio was 10.77% under the Standardized Approach, above the 9.0% minimum including the buffer and G-SIB surcharge. Total loans were $967.6 billion, up 6%, and deposits were $1.3 trillion, up 7%. The company targets a long-term CET1 ratio of 10% or more.
What credit risks does the company highlight for 2017?
Key risks include oil and gas exposure, which represented 2% of loans, with $2.4 billion of nonaccrual loans and about $1.3 billion of allowance allocated. Consumer risks include auto and credit card losses, which rose in 2016, and the recast of Pick-a-Pay option payment loans, with $780 million expected to recast in 2017. Commercial real estate concentration is also a factor, with office buildings representing 28% of the CRE portfolio.
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