Fitch Affirms Wells Fargo's L-T IDR at 'AA-' Following Large Regional Bank Review, Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Wells Fargo & Company's (WFC) ratings at 'AA-/F1+'. The Rating Outlook remains Stable. The affirmation reflects its superior earnings profile, diversified business model, and strong management team.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Financial Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holdings Corporation (MUFG), PNC Financial Services Group, Inc. (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS - VRs, IDRs, and Senior Debt:

Wells Fargo & Company's (WFC) ratings were affirmed primarily reflecting the company's superior earning profile, strong franchise and business model, and experienced management team. The company's capital and liquidity profiles remain solid, and asset quality continues to improve.

WFC's financial performance over the past several years has been very solid despite a challenging economic and interest rate environment. WFC continues to post very strong net income each quarter, with return on assets (ROAs) well in excess of the large regional average. This is particularly noteworthy given the dramatic slowdown in refinancings beginning in the second half of last year, and WFC's prominent role in mortgage.

Fitch considers WFC's franchise and business model as a key rating strength. WFC boasts leading market shares in many areas, including mortgage originations, servicing, commercial real estate, small business lending, automobile lending, and private student lending. WFC's retail branch network had either the leading or second largest market share in 25 of the 39 states in which it operates. Furthermore, WFC is either first, second or third in markets that comprise over 90% of total consolidated deposits. WFC offers a wide range of financial services through more than 80 different business lines. This diversity helps insulate the company from downturns in various product lines, as evidenced by the recent mortgage refinancing slowdown.

WFC's management team is viewed very favorably by Fitch. There has been a great deal of stability in the executive management ranks, with little turnover. What also sets WFC apart from its peers is the bench strength and tenure with WFC of the executive management team. The average tenure with WFC of the operating committee, which comprises the business lines heads, as well as the company's CEO, CRO, CFO and general counsel, is approximately 27 years. Fitch views this as a competitive strength as the company's strategic direction and corporate culture remains consistent, and less vulnerable to swings in strategy. WFC's stated strategic objectives are clearly articulated, and achievable. Even during a challenging interest rate environment, the company is able to easily meet its four publicly stated financial targets.

Fitch believes that WFC is appropriately capitalized, particularly given its solid funding and earnings profiles, to manage through continued economic challenges ahead. WFC's estimated common equity Tier I (CETI) under Basel III (Advanced Approach, fully phased-in) was 10.14% at June 30, 2014, slightly above the company's internal target of 10%. WFC indicated that CCAR is the primary driver influencing targeted capital ratios.

WFC, like the industry, is vulnerable to a rapid unexpected increase in interest rates, particularly in its securities portfolio. Approximately 60% of the AFS portfolio is made up mortgage-backed securities, which are exposed to a rising rate environment given possible extension risk. At June 30, 2014, net unrealized gains in the mortgage-backed securities portfolio totaled $3.7 billion. If rates were to rise 200 basis points (bps), the unrealized position would fall to a loss of $10.3 billion in the mortgage-backed securities portfolio. Fitch estimates that this would lead to an approximate 70 bps decline in the company's estimated CETI under Basel III. As such, and given the treatment of MSRs under Basel III and the finalization of any systemically important capital buffer for WFC, Fitch expects WFC to maintain an appropriate capital buffer to withstand the related volatility in capital ratios.

WFC is primarily deposit funded, with core deposits representing 75% of total funding sources as of June 30, 2014. Fitch views WFC's deposit franchise as currently undervalued in this low-rate environment. As deposit rates have fallen from pre-crisis levels, the benefit to WFC from its low cost of funding has compressed. When interest rates rise, WFC will likely be able to maintain lower funding costs relative to peers, helping to maintain superior profitability metrics in a higher interest rate environment.

WFC's high credit ratings have helped it gain universal acceptance in virtually all global capital markets on favorable terms, and Fitch anticipates that WFC will continue to be able to easily issue debt to meet upcoming debt maturities and other requirements. The parent's liquidity profile is considered solid, and may be impacted given the outcome of Orderly Liquidity Authority (OLA)-related proposed long-term debt requirements.

WFC will likely be one of the banking institutions that is assigned a long-term debt requirement to facilitate resolution under OLA. Fitch notes that if the regulators do not pursue a risk-based approach and rather apply a one-size fits all approach, WFC will likely be the most disadvantaged of the U.S.-based G-SIBs given its greater reliance on deposit funding and, hence, lower levels of outstanding long-term debt. Fitch expects that WFC should be able to meet a debt requirement, assuming there is a sufficient phase-in period. WFC still needs to issue preferred stock and subordinated debt to meet Basel III capital requirements and expects that to count toward the long-term debt requirement.

WFC's credit risk metrics have improved alongside the industry, but non-performing asset (NPA) ratios remain very elevated and are the highest amongst the large regional bank peer group. Much of the weak relative performance is due to a large balance of mortgage-related accruing TDRs. WFC entered the crisis with a larger relative exposure to home mortgages and home equity products than its peers. Despite higher NPA levels, net charge-offs (NCOs) are roughly in line with peer averages. Troubled debt restructurings (TDRs) are high and are expected to remain elevated; however, Fitch views WFC's strong earnings capacity as an adequate risk mitigant.

RATING SENSITIVITIES - VRs, IDRs, and Senior Debt:

Given that WFC's ratings are already at the top of the global rated bank universe, Fitch views limited potential for a ratings upgrade over the near term. Conversely, failure to maintain earnings at current levels will pressure WFC's ratings. The strength of the earnings stream provides for solid capital generation capabilities, which will help absorb unexpected losses.

Fitch notes some expansion recently of the wholesale banking business segment, as WFC builds out its international presence and capital markets offerings. Fitch expects any expansion by WFC internationally or in investment banking to remain a primarily customer-focused strategy, and outside of that, both are expected to remain relatively small in terms of total business mix. If WFC were to increase its investment banking business to a size in line with other large trading banks, there would likely be negative rating implications, although Fitch views this as unlikely over the near term.

Fitch is aware that WFC has the ability to compete for loan growth by offering competitive pricing given its low-cost funding base and its ability to ensure adequate total relationship profitability with other cross-sold services and products. However, despite the company's historical track record of being sound risk managers, this bears close monitoring as it may point to an incremental shifting in the company's risk appetite. Fitch remains concerned regarding the entire industry's search for yield and stretching for risk as a result of the continued low-yield environment. Given WFC's strong profitability metrics, Fitch expects this possible impulse would be less urgent then at other banking institutions. Nonetheless, if a significant shift in the risk appetite became apparent, this would likely pressure ratings.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

WFC's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation that there remains an extremely high probability of support from the U.S. government if required. This expectation reflects the U.S.'s extremely high ability to support its banks especially given its strong financial flexibility, though propensity is becoming less certain. Specific to WFC, Fitch's view of support likelihood is based mostly on their systemic importance in the U.S., significant deposit market share, and its position as a key provider of financial services to the U.S. economy. WFC's IDRs and senior debt ratings do not benefit from support because its VR is above the SRF.

However, in Fitch's view, there is a clear intention to reduce support for G-SIFIs in the U.S., as demonstrated by the Dodd Frank Act (DFA) and progress regulators have made on implementing the Orderly Liquidation Authority (OLA). The FDIC has proposed its single point of entry (SPOE) strategy and further initiatives are demonstrating the U.S. government's progress to eliminate state support for U.S. banks going forward, which increases the likelihood of senior debt losses if its banks run afoul of solvability assessments.

RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

The SR and SRF are sensitive to progress made in finalizing the SPOE strategy and any additional regulatory initiatives that may be imposed on the G-SIFIs, including debt thresholds at the holding company. Fitch's assessment of continuing support for U.S. G-SIFIs has to some extent relied upon the feasibility of OLA implementation rather than its enactment into law (when DFA passed). Hurdles that remain include the resolution of how cross-border derivative acceleration/termination provisions are handled and that there is sufficient contingent capital at the holding company to recapitalize without requiring government assistance.

Fitch expects that the SPOE strategy and regulatory action to ensure sufficient contingent capital will be finalized in the near term, but regardless of its finalization Fitch believes that sufficient regulatory progress continues to be made over the rating in the ratings time horizon. Therefore, Fitch expects to revise WFC's Support Rating to '5' and SRF to 'No Floor' in the next 12-18 months. A revision of the SRF to 'No Floor' would mean no change to WFC's long-term IDR and debt ratings because their viability ratings are all above the SRF.

KEY RATING DRIVERS - HOLDING COMPANY

WFC's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.

RATING SENSITIVITIES - HOLDING COMPANY

Should WFC's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely though for WFC given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. This may result in a possible downgrade of WFC's holding company rating, an upgrade of operating company ratings, or no changes to ratings if Fitch's views the long-term debt requirement assigned to WFC as providing an insufficient amount of bail-in capital at the operating company level.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of WFC's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of Wells Fargo Bank N.A. and Wells Fargo Bank Northwest N.A. are equalized across the group.

The IDRs and VRs of WFC's other major rated operating subsidiaries are equalized with WFC's IDR reflecting Fitch's view that these entities are core to WFC's business strategy and financial profile. These entities include: Wells Fargo Canada Corp, Wachovia Capital Finance Corporation (Canada), and Wells Fargo Securities International Limited, whose IDRs would be sensitive to the same factors that might drive a change in WFC's IDR.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalized with those of WFC to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in WFC's IDRs.

To the extent that one of WFC's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from WFC's IDR.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by WFC and by various issuing vehicles are all notched down from WFC or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by WFC and its subsidiaries are primarily sensitive to any change in WFC's VR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

WFC's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. However, WFC's uninsured deposits outside of the U.S. do not benefit from rating uplift because they do not typically benefit from the U.S. depositor preference unless the deposit is expressly payable at an office of the bank in the United States. Since Fitch cannot determine which foreign branch deposits may be dually payable, they do not get the rating uplift.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by WFC and its subsidiaries are primarily sensitive to any change in WFC's long- and short-term IDRs.

Fitch has affirmed the following ratings:

Wells Fargo & Co.

--Long-term IDR at 'AA-'; Outlook Stable;

--Senior debt at 'AA-';

--Subordinated debt at 'A+';

--Preferred stock at 'BBB';

--Short-term IDR at 'F1+';

--Commercial paper at 'F1+';

--Short-term debt at 'F1+';

--Market-linked securities at 'AA- EMR';

--Viability at 'aa-';

--Support at '1';

--Support floor at 'A'.

Wells Fargo Bank, NA

--Long-term IDR at 'AA-'; Outlook Stable

--Long-term deposits at 'AA';

--Market-linked securities at 'AA EMR';

--Senior debt at 'AA-';

--Subordinated debt at 'A+';

--Short-term IDR at 'F1+';

--Short-term deposits at 'F1+';

--Short-term debt at 'F1+';

--Viability at 'aa-';

--Support at '1';

--Support Floor at 'A'.

Wells Fargo Bank Northwest, NA

--Long-term IDR at 'AA-'; Outlook Stable;

--Long-term deposits at 'AA';

--Senior debt at 'AA-';

--Short-term IDR at 'F1+';

--Short-term deposits at 'F1+';

--Viability at 'aa-';

--Support at '1';

--Support Floor at 'A'.

Wachovia Bank, N.A.

--Long-term deposits at 'AA';

--Senior debt at 'AA-';

--Short-term deposits at 'F1+';

--Subordinated debt at 'A+'.

Wachovia Mortgage, FSB

Wachovia Bank, FSB (Texas)

--Short-term deposits at 'F1+'.

Wells Fargo Canada Corp.

--Long-term IDR at 'AA-'; Outlook Stable

--Short-term IDR at 'F1+';

--Senior debt at 'AA-';

--Short-term debt at 'F1+'.

Greater Bay Bancorp, Inc.

--Senior debt at 'AA-'.

Greater Bay Bank, N.A.

--Long-term deposits at 'AA'.

Wachovia Corporation

--Commercial paper at 'F1+';

--Senior debt at 'AA-';

--Subordinated debt at 'A+';

--Preferred stock at 'BBB'.

Wachovia Capital Finance Corporation (Canada)

--Short-term IDR at 'F1+'.

Wells Fargo Bank International

--Support at '1';

--Long-term deposits at 'AA-';

--Short-term deposits at 'F1+'.

Wells Fargo Securities International Limited

--Long-term IDR at 'AA-'; Outlook Stable;

--Short-term IDR at 'F1+'.

SouthTrust Bank

--Senior debt at 'AA-';

--Subordinated debt at 'A+'.

First Union National - Florida

WFC Holdings, Inc.

--Subordinated debt at 'A+'.

Wells Fargo Capital II, X

Wachovia Capital Trust II

Central Fidelity Capital Trust I

Corestates Capital II, III

First Union Capital II

--Preferred at 'BBB+'.

Wachovia Capital Trust III

--Preferred at 'BBB.'

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);

--'Risk Radar Global 3Q14' (Sept. 15, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis -- 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 3Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891895

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Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com