01—Abstract
Summary
Summary of the 10-K filed February 27, 2020. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo reported 2019 net income of $19.5 billiona, or $4.05 diluted EPS, down from $22.4 billion and $4.28 in 2018.
The decline was driven by a $2.8 billionb drop in net interest income (net interest margin fell to 2.73% from 2.91%, reflecting a flatter yield curve and higher promotional deposit costs), a $2.1 billion rise in noninterest expense (to $58.2 billion, with operating losses up 38% on litigation accruals), and a $943 million increase in the provision for credit losses. Partial offsets included a $1.4 billion increase in noninterest income, helped by gains on the sales of the Institutional Retirement and Trust business, Eastdil, and equity securities. Credit quality remained solid, with net charge-offs flat at 0.29% and nonaccrual loans down 18% to $5.3 billion.
Capital remained strong. The CET1 ratio was 11.14% (versus an internal target of 10%), and the company returned $30.2 billionc to shareholders through dividends and net buybacks, while repurchasing 502.4 million shares. The dividend was raised to $0.51 per quarter from $0.43.
Total assets were $1.93 trilliond, and the company remains the fourth-largest U.S. bank holding company by assets. The filing is dominated by the company's ongoing regulatory remediation. A February 2018 Federal Reserve consent order caps total consolidated assets at the December 31, 2017 level until governance and risk-management plans are approved and third-party reviews are completed.
Additional CFPB/OCC consent orders and the 'Needs to Improve' CRA rating remain in place. In February 2020, after the period end, the company agreed to pay $3.0 billion to resolve Department of Justice and SEC investigations into its retail sales practices, and it faces a range of other legal matters, with a reasonably possible additional loss of up to about $2.6 billion above accruals.
02—Key points
Key Highlights
- Net income fell 13% to $19.5 billion ($4.05 diluted EPS) as lower net interest income (down $2.8 billion, NIM 2.73% vs. 2.91%) and higher noninterest expense (+$2.1 billion, efficiency ratio 68.4%) outweighed a $1.4 billion increase in noninterest income.
- Credit quality stayed solid: net charge-off rate flat at 0.29%, nonaccrual loans fell 18% to $5.3 billion, and the allowance for credit losses was $10.5 billion (1.09% of loans).
- Capital is strong: CET1 ratio of 11.14% versus a 10% internal target, with $30.2 billion returned to shareholders (dividends plus net buybacks) and 502.4 million shares repurchased in 2019.
- The quarterly dividend was raised from $0.43 to $0.51 per share, and the company expects its share count to keep declining in 2020.
- The February 2018 FRB consent order caps total consolidated assets at the December 31, 2017 level until remediation is approved and reviewed by third parties, constraining balance sheet growth.
- Retail sales practices remain a major overhang: a $3.0 billion DOJ/SEC settlement was agreed on February 21, 2020, after period end, and the company has disclosed up to about $2.6 billion of reasonably possible losses above accruals across legal matters.
- A new five-line-of-business organizational structure was announced on February 11, 2020, alongside significant senior management changes, including a new CEO (Charles Scharf, since October 2019).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 27, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $85.06B$86.41B | −1.6% |
| Interest Expense | $18.85B$14.65B | +28.7% |
| Net Income | $19.71B$22.39B | −12.0% |
| EPS (Basic) | $4.12$4.31 | −4.4% |
| EPS (Diluted) | $4.09$4.28 | −4.4% |
| Shares Outstanding (Basic) | 4.39B4.80B | −8.5% |
| Shares Outstanding (Diluted) | 4.43B4.84B | −8.5% |
05—Questions
Frequently Asked Questions
Why did Wells Fargo's earnings decline in 2019?
Net income fell 13% to $19.5 billion. The main drivers were a $2.8 billion decline in net interest income, as the net interest margin compressed to 2.73% from 2.91% amid a flatter yield curve and higher deposit promotional pricing. Noninterest expense rose $2.1 billion to $58.2 billion, largely from higher operating losses tied to litigation accruals and higher personnel costs. The provision for credit losses also increased by $943 million. Noninterest income rose $1.4 billion, partly offsetting these pressures.
How strong is Wells Fargo's capital position?
Capital is solid. The CET1 ratio was 11.14% at December 31, 2019, down from 11.74% a year earlier but well above the company's 10% internal target and the required minimums. Total equity was $188.0 billion. The company returned $30.2 billion to shareholders in 2019 through dividends and net share repurchases, which kept the net payout ratio at 168%. Management expects the share count to keep declining in 2020.
What are the main regulatory constraints on Wells Fargo's growth?
The most significant constraint is the February 2018 Federal Reserve consent order, which limits total consolidated assets to the December 31, 2017 level until the company's governance and risk-management plans are approved and implemented and third-party reviews are complete. The company also remains under April 2018 CFPB and OCC consent orders and holds a 'Needs to Improve' CRA rating, which restricts certain nonbank activities and some acquisitions. These restrictions could limit revenue growth and increase compliance costs.
What legal risks should investors be aware of?
Legal exposure is significant. On February 21, 2020, after the period end, Wells Fargo agreed to pay $3.0 billion to resolve Department of Justice and SEC investigations into retail sales practices, including a $500 million Fair Fund. Operating losses rose 38% in 2019 on litigation accruals. The company also faces CPI and GAP automobile insurance matters, a Visa/MasterCard interchange settlement, the USAA mobile deposit patent verdicts, and other investigations. The high end of reasonably possible losses above accruals was about $2.6 billion.
How did credit performance and asset quality trend in 2019?
Credit performance was solid. The net charge-off rate held flat at 0.29% of average loans, with commercial charge-offs rising on oil and gas and commercial and industrial exposure, while automobile losses declined. Nonaccrual loans fell $1.2 billion, or 18%, to $5.3 billion, and nonperforming assets fell to $5.6 billion. The allowance for credit losses decreased to $10.5 billion, or 1.09% of total loans, as commercial and residential real estate improved. The company adopts the CECL accounting standard on January 1, 2020, which is expected to reduce the allowance by about $1.3 billion.
06—Continue