01—Abstract
Summary
Summary of the 10-K filed February 27, 2019. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo's 2018 Form 10-K (filed February 27, 2019) shows a $1.9 trilliona diversified financial services company, the fourth-largest U.S. bank holding company by assets, with 258,700 full-time equivalent team members.
Net income rose modestly to $22.4 billionb, and diluted EPS increased 4% to $4.28, helped by a lower 20.2% effective tax rate after the 2017 Tax Act. Revenue fell 2% to $86.4 billion as noninterest income dropped 6% on weaker mortgage banking, insurance, and deposit service charges. Net interest income grew 1% to $50.0 billion, and net interest margin improved to 2.91%.
Credit quality remained strong, with a net charge-off rate of 0.29% and nonaccrual loans down 15% to $6.5 billionc. The central investor concern is the company's ongoing remediation and regulatory overhang. A February 2018 Federal Reserve consent order caps total consolidated assets at the December 31, 2017 level, and the company expects to operate under that cap through the end of 2019.
Separate April 2018 CFPB and OCC consent orders carry $1 billiond in civil penalties, and the company disclosed continuing reviews of retail sales practices, automobile lending, fiduciary fees, and foreign exchange pricing. Deposits fell $49.8 billion, or 4%, partly due to asset-cap actions. The company also disclosed a February 7, 2019 data center outage that disrupted online banking and mortgage origination systems.
Capital returns remained substantial. The company returned $25.8 billion to shareholders through dividends and net buybacks, repurchasing 375.5 million shares. The Common Equity Tier 1 ratio was 11.74% on a fully phased-in basis, above the company's 10% internal target.
The dividend was raised from $0.39 to $0.43 per quarter during 2018. Management expects further share count reduction in 2019.
02—Key points
Key Highlights
- Net income of $22.4 billion and diluted EPS of $4.28, up from $4.10 in 2017, with ROE of 11.53% and ROA of 1.19%.
- Revenue declined 2% to $86.4 billion, with noninterest income down 6% to $36.4 billion on lower mortgage banking ($3.0 billion vs. $4.4 billion) and insurance income following the 2017 insurance business sale.
- Net interest margin rose to 2.91% from 2.87%, and net interest income increased 1% to $50.0 billion, driven by higher interest rates.
- Federal Reserve consent order (February 2018) limits total assets to the December 31, 2017 level, with the cap expected to remain in place through the end of 2019.
- CFPB and OCC consent orders (April 2018) require $1 billion in civil money penalties and remediation tied to auto collateral protection insurance and mortgage rate lock extensions; a $575 million multistate settlement was also reached in December 2018.
- Capital strength: CET1 ratio of 11.74% (fully phased-in) versus a 10% target; $25.8 billion returned to shareholders, and quarterly dividend increased to $0.43.
- Credit quality improved: net charge-off rate of 0.29%, nonaccrual loans down 15% to $6.5 billion, and allowance for credit losses reduced to $10.7 billion (1.12% of loans).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 27, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $86.41B$88.39B | −2.2% |
| Interest Expense | $14.65B$9.35B | +56.7% |
| Net Income | $22.39B$22.18B | +0.9% |
| EPS (Basic) | $4.31$4.14 | +4.1% |
| EPS (Diluted) | $4.28$4.10 | +4.4% |
| Shares Outstanding (Basic) | 4.80B4.96B | −3.3% |
| Shares Outstanding (Diluted) | 4.84B5.02B | −3.6% |
05—Questions
Frequently Asked Questions
Why did Wells Fargo's revenue decline in 2018 even though net income increased?
Revenue fell $2.0 billion to $86.4 billion, mainly because noninterest income dropped 6%. Mortgage banking income fell from $4.4 billion to $3.0 billion due to lower origination volumes and margins, insurance income fell after the 2017 sale of Wells Fargo Insurance Services, and service charges on deposits declined. Net income rose anyway because the 2018 effective tax rate fell to 20.2% from 18.1% in 2017 after the Tax Act, which lowered the federal rate to 21%, and because noninterest expense declined 4% to $56.1 billion, largely due to lower litigation accruals. The 2017 figure included a $3.9 billion deferred tax benefit that offset the litigation charges, so the year-over-year comparison is distorted.
What does the Federal Reserve asset cap mean for Wells Fargo's growth?
Under the February 2018 Federal Reserve consent order, total consolidated assets may not exceed the December 31, 2017 level, measured on a two-quarter daily average basis. The cap stays in place until third-party reviews of the company's governance and compliance improvements are completed and accepted, and the company plans to operate under it through the end of 2019. Total assets were $1.90 trillion at year-end 2018, down $55.9 billion. Deposits declined $49.8 billion partly due to actions taken to comply with the cap. The cap limits balance sheet growth, so earnings growth must come from pricing, mix, and efficiency rather than asset expansion.
How strong is Wells Fargo's capital position, and can it sustain shareholder returns?
Capital is solid. The Common Equity Tier 1 ratio was 11.74% under the Standardized Approach on a fully phased-in basis, versus a 9.0% regulatory minimum and the company's 10% internal target, and the Tier 1 leverage ratio was 9.07%. The company returned $25.8 billion in 2018 through dividends and net buybacks, equal to a 125% net payout ratio, which exceeded earnings and reduced CET1 by roughly $7.7 billion. The Federal Reserve must approve capital plans annually, and the company expects a stress capital buffer proposal could raise required minimums. Sustained returns above earnings therefore depend on continued regulatory non-objection and on the asset cap not forcing capital retention.
What are the main remaining legal and conduct risks disclosed in the filing?
The filing describes an extensive set of open matters. These include the retail sales practices review, including unauthorized account opening, for which the company has accrued $142 million for the Jabbari class settlement and continues to review additional harm; automobile lending issues involving collateral protection and GAP insurance, which led to a $575 million multistate settlement; mortgage rate lock extension fees; fiduciary and custody account fee errors; foreign exchange pricing remediation; and mortgage loan modification calculation errors. The company estimates the high end of reasonably possible losses above its accruals at about $2.7 billion, and it says it cannot determine whether the ultimate retail sales practices outcome will be material. Investors should treat these items as ongoing, with further remediation and penalties possible.
How did deposit trends and funding costs change in 2018?
Deposits fell $49.8 billion, or 4%, to $1.29 trillion, driven by a decline in commercial deposits from financial institutions, partly reflecting asset-cap actions, and by consumer and small business balances moving to higher-yielding alternatives. The average deposit cost rose 21 basis points, reflecting higher wholesale and WIM deposit rates. Total interest expense rose sharply, with deposit interest up to $5.6 billion from $3.0 billion and long-term debt interest up to $6.7 billion from $5.2 billion. Noninterest-bearing deposits fell 6%, and deposits represented 135% of total loans, down from 140%, indicating reduced core funding strength. Management relied more on long-term debt issuance of $47.6 billion during 2018.
06—Continue