S&P – Wells Fargo Credit Rating Unaffected by Strong Q3 Results

October 18 00:00 2011

NEW YORK, October 18 (RainbowNewsLine.com) – S&P Rating Services maintains the credit rating of Wells Fargo & Co at AA-/Negative/A-1+, despite reporting relatively good Q3 results.

In a research note published yesterday, analysts at S&P says that WFC made $6.1 billion as pretax income for Q3, which is unchanged compared to last quarter but up 18.6% yoy. Q3 results gained from $800 million in reserves but still down by $1 billion from previous quarter. The decline in pre-provision earnings is due to lower net interest income. Considering Q2 expense level, the company is aiming for cost reduction of 10-14% by the end of 2012.

WFC’s credit quality keeps improving but given the credit cycle, the progress should slow down, the analysts say. However, the steady improvement in credit quality depends on the further economic expansion. The company’s non-performing assets were down in Q3 when compared to previous years. Core loans increased by 2% due to growth in commercial portfolios. The Net Interest margin fell down by 17 basis points reflecting quality increase in deposits with low yields on short-term investments. In addition, NIM is expected to keep declining until rates start to increase again, the analysts add.

In Q3 Tier I common equity was up 20 basis points from last quarter and 134 basis point up from the previous year. Wells Fargo booked Basel III Tier 1 common ratio of 7.4%, which is actually flat against the second quarter due to increase in risk-weighted assets. The analyst believes that the company will keep on adding capital in anticipation of Basel III, which will get balanced against shareholders return. The company cashed in $5.8 billion in trust-preferred securities by the end of Q3, which slows the growth of capital as estimated by risk adjusted capital framework. S&P will continue to monitor the impact of housing market, new regulations, litigation, the weakening economic outlook, systemic liquidity, and funding issues originating from Europe that are affecting the US banking industry.