Fitch affirms Wells Fargo
Global rating agency Fitch has completed review of the following 14 rated large regional banks: BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc (STI), US Bancorp (USB), UnionBanCal Corporation ( UBC), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION). Refer to the release titled 'Fitch Affirms Large Regional Bank Ratings Following Industry Peer Review' for a discussion of rating actions taken on the other large regionals banks.
Global rating agency Fitch said WFC's ratings were affirmed at 'AA-', primarily reflecting the company's strong earnings profile, solid liquidity position, and sound capital ratios. These strengths are offset by a growing concentration to the residential mortgage market and weaker than average asset quality ratios. WFC has a meaningful exposure to the residential real estate market as a result of its #1 market share in origination and servicing, its large portfolio of first and second lien mortgages and mortgagebacked securities portfolio. The exposure has increased in the last year reflecting increased origination activity and retrenchment of key competitors.
Global rating agency Fitch views this concentration as a potential source of rating sensitivity for WFC, though there are no direct rating implications at this time.
Fitch expects this concentration to moderate over time as the current refinancing boom slows, competitors become more active and WFC grows other consumer loan books, as well as its commercial portfolio. WFC's MSR asset also has meaningful capital implications under Basel III. As of Sept. 30, 2012, WFC was not over the threshold for MSRs under Basel III; however, when rates rise, the value of MSRs should presumably rise given the expectation of lower prepayment speeds. As MSRs increase in value, deductions to capital ratios may result and adversely impact capital ratios.
Global rating agency Fitch already deducts 100% of MSRs in its calculations of Fitch Core Capital. WFC is considering potential strategies for dealing with the MSR cap under Basel III, including servicing sales and de-emphasizing third party lending channels. As a result of the different treatment of MSRs and the inclusion of other comprehensive income under Basel III, Fitch expects WFC to maintain an appropriate capital buffer to withstand the related volatility in capital ratios.
Further, failure to lessen the mortgage concentration could pressure WFC's ratings over time.