CHICAGO--(BUSINESS WIRE)--Wells Fargo & Company (WFC) reported $5.7 billion in net income for a Return on Assets (ROA) of 1.36%, essentially unchanged from the prior quarter. Earnings were supported by higher spread income and lower taxes, partially offset by increased loan loss provisioning and higher noninterest expenses. Fitch Ratings views these results as consistent with WFC's credit profile, with ratings that remain among the highest in the world, supported primarily by its superior earnings profile. WFC's more commercial bank-focused business model continues to help set itself apart from its large bank peers, with less exposure to volatile capital markets revenues and while not immune, much lower litigation-related expenses than other large bank peers.
Higher spread income was supported by average earning asset growth of 3% linked-quarter. The net interest margin (NIM) contracted 2bps in 4Q'14, a level below the prior quarters NIM compression. The compression was attributed to last quarter's liquidity-related actions and deposit growth. WFC continues to report very strong core deposit growth, up 7% from a year ago.
WFC reported strong core loan growth in 4Q'14, driven by organic growth, $6.5 billion in financing related to the sale of government guaranteed student loans, and the acquisition of Dillard's credit card portfolio. Somewhat offsetting this, auto growth slowed during the quarter. Over the prior four quarters, this book had been growing on average by about a $1.4 billion a quarter. However, citing the company's risk and price discipline in a competitive market environment, automobile loans increased by roughly $500 million.
Overall noninterest income was flat on a linked-quarter basis. Higher investment banking fees, a $217 million gain on the sale of student loans, and higher trust and investment fees were offset by lower deposit service charges, mortgage banking revenues and market-sensitive revenues.
Mortgage banking revenues declined 7% on a sequential basis reflecting a typically slow quarter. However, with the drop in the 10 year in mid-October and then again in December, this helped lead to an increase in the application pipeline, with refinancings accounting for 52% of applications, which represents a nice uptick over prior quarters.
Market-sensitive revenues, which include gains and losses on equity investments, trading activities, and debt securities, declined 35%, following a strong 3Q'14 in which WFC realized over $700 million in net gains from equity investments, primarily from Norwest Venture Partners. Period-end trading assets increased by $10.5 billion or 16% on increased inventory for market making activity. Despite the increase, trading assets still only account for less than 5% of total assets, a level well below other large bank peers. Further, the market-sensitive revenues combined with investment banking fees, were around 6% of total revenues; once again well below the average for Bank of America, Citi and JPM, who typically average 25% of revenues.
Expenses were up 3% on a sequential basis reflecting higher personnel expenses, primarily due to higher deferred compensation costs (which are earnings neutral as offset in trading revenues), and increased equipment expenses and outside professional fees. This was partially offset by lower operating losses related to lower litigation accruals. WFC expects to operate within its targeted efficiency range of 55% to 59% in 2015.
WFC noted that no oil-related charges were incurred in 4Q'14, and gave more specific information related to energy-related exposure. Lending to oil and gas businesses totaled around $17 billion (or 2% of total loans), while securities classified as either trading or available for sale accounted for less than $1.5 billion. These exposures together comprised a manageable 13% of Common Equity Tier 1 under Basel III. WFC also generates revenues from debt and equity underwritings, and loan syndication fees. These fees have averaged around $100 million to $300 million over the last several years, a relatively small amount in the context of quarterly earnings of over $5 billion.
WFC reported a smaller reserve release on a sequential basis of $250 million as compared to $300 million last quarter. Net charge-offs (NCOs) reflected a still benign credit environment at just 34bps, up slightly on lower recoveries in Wholesale. Due primarily to loan growth, provision expenses increased 32% sequentially. WFC indicated that future loan loss reserve levels will depend on loan growth and mix, portfolio performance, and general economic conditions.
The estimated Common Equity Tier 1 under Basel III Advanced Approach, fully phased-in, fell 3bps to a still solid 10.44% at quarter-end. The linked-quarter decline was due to balance sheet growth.
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