01—Abstract
Summary
Summary of the 10-K filed February 23, 2021. Cited figures are marked; the original filing is the authoritative source.
Wells Fargo reported a sharply weaker 2020 as the COVID-19 pandemic forced a large increase in credit provisioning and pressured revenue.
Net income fell to $3.3 billiona ($0.41 diluted EPS) from $19.5 billion ($4.05) in 2019. The provision for credit losses rose to $14.1 billion from $2.7 billion, net interest income fell 16% to $39.8 billion, and noninterest income fell 14% to $32.5 billion. Restructuring charges of $1.5 billion tied to the efficiency initiatives also weighed on results.
The return on average equity dropped to 1.04% and the efficiency ratio rose to 79.7%. Balance sheet strength remained a bright spot. Total assets were about $1.96 trillionb, deposits grew 6% to $1.40 trillion, and the Common Equity Tier 1 ratio was 11.59%, above the 9% requirement and the company's 10% internal target.
The allowance for credit losses for loans more than doubled to $19.7 billionc, with the allowance coverage at 2.22% of total loans, and nonperforming assets rose 57% to $8.9 billion. The company is still operating under the February 2018 Federal Reserve consent order, which caps total consolidated assets at the December 31, 2017 level. Regulators also limited capital distributions for the first quarter of 2021, which constrains buybacks and dividend growth.
Looking ahead, management announced the sale of Wells Fargo Asset Management for $2.1 billiond (retaining a 9.9% stake), an increase of 500 million shares to its buyback authorization, and about $4.5 billion of preferred stock redemptions in March 2021. Investors will focus on whether credit losses have peaked, whether the regulatory asset cap and capital distribution limits ease, and whether the efficiency initiatives can lower the expense base.
02—Key points
Key Highlights
- Net income fell 83% to $3.3 billion ($0.41 diluted EPS) in 2020, compared with $19.5 billion ($4.05 diluted EPS) in 2019, driven by a $11.4 billion increase in the provision for credit losses.
- Total revenue declined 15% to $72.3 billion, with net interest income down 16% to $39.8 billion due to the lower rate environment and a 14% drop in noninterest income to $32.5 billion.
- The allowance for credit losses for loans rose to $19.7 billion (2.22% of total loans) from $10.5 billion, reflecting COVID-19 economic forecasts; nonperforming assets increased 57% to $8.9 billion.
- Capital remained strong, with a CET1 ratio of 11.59% versus a 9% regulatory requirement and a 10% internal target, plus a liquidity coverage ratio of 133%.
- The company recognized $1.5 billion of restructuring charges under efficiency initiatives, and the efficiency ratio deteriorated to 79.7% from 68.4%.
- Strategic actions included an agreement to sell Wells Fargo Asset Management for $2.1 billion, a 500 million share increase to the repurchase authorization, and $4.5 billion of preferred stock redemptions scheduled for March 2021.
- The February 2018 FRB consent order continues to cap total consolidated assets at the December 31, 2017 level, and FRB capital distribution limits remain in effect for first quarter 2021.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 23, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Interest Expense | $7.96B$18.85B | −57.8% |
| Net Income | $3.38B$19.71B | −82.9% |
| EPS (Basic) | $0.43$4.12 | −89.6% |
| EPS (Diluted) | $0.43$4.09 | −89.5% |
| Shares Outstanding (Basic) | 4.12B4.39B | −6.3% |
| Shares Outstanding (Diluted) | 4.13B4.43B | −6.6% |
05—Questions
Frequently Asked Questions
Why did Wells Fargo's earnings fall so sharply in 2020?
The main driver was a $11.4 billion increase in the provision for credit losses, which reached $14.1 billion in 2020 as the company reserved for expected losses from the COVID-19 pandemic. Net interest income also fell $7.4 billion due to lower interest rates, and noninterest income dropped $5.3 billion, partly because 2019 included large one-time gains from the sales of the IRT business and PCI loans. Restructuring charges of $1.5 billion added to expenses.
Is Wells Fargo's capital position sufficient to absorb further losses?
Based on the disclosed ratios, yes. The CET1 ratio was 11.59% at December 31, 2020, compared with a 9% regulatory minimum and a 10% internal target, and total loss absorbing capacity was 25.74% of risk-weighted assets versus a 22% requirement. However, regulators restricted capital distributions for the first quarter of 2021, so buybacks and dividend increases are limited.
What is the status of the regulatory asset cap?
Under the February 2018 Federal Reserve consent order, total consolidated assets are limited to the December 31, 2017 level until the company completes a third-party review of its governance and risk management enhancements and the Federal Reserve approves them. In April 2020, the Federal Reserve allowed exclusion of PPP and Main Street Lending Program loans from the cap. The company's assets were about $1.96 trillion at year end.
What are the key risks highlighted in the filing?
Key risks include the uncertain duration and severity of the COVID-19 economic impact on credit quality, particularly in commercial real estate, oil and gas, and hotel and retail sectors; LIBOR transition risk affecting approximately $475 billion of assets; ongoing regulatory consent orders and legal matters, including retail sales practices and auto lending; cybersecurity threats; and interest rate sensitivity, where a 100 basis point parallel rise would increase net interest income by about $6.7 billion.
What is the outlook for shareholder returns?
The company dividend declared was $1.22 per share for 2020, down from $1.92 in 2019. Its board authorized an additional 500 million share repurchase in January 2021, bringing remaining authority to roughly 667 million shares, but the Federal Reserve's capital distribution limits restrict the amount that can be returned in the near term. Investors should watch the Federal Reserve's decision on distribution limits, expected by March 31, 2021.
06—Continue