OREANDA-NEWS. Wells Fargo & Company (WFC) reported $5.7 billion in net income for an ROA of 1.33%, down $85 million from last quarter. Earnings were supported by spread income growth, lower credit costs, and controlled expenses. WFC remains within its targeted ranges for ROA, ROE and the efficiency ratio, which are 1.3% to 1.6%, 12% to 15%, and 55% to 59%, respectively. Fitch Ratings views these results as in line with expectations for WFC, one of the strongest and most consistent earnings profiles in the industry.

Last quarter's results benefitted from a net $359 million discrete tax benefit due to the resolution of prior period matters with federal and state taxing authorities. Excluding this, income increased nearly 5% sequentially.

Spread income was up 3% on a linked-quarter basis due to earning asset growth, while noninterest income fell 2% from both a year ago and sequential quarter basis partially due to lower trading gains and lower gains on the sales of debt securities. Linked-quarter and prior-year comparisons also reflected a significant decline in other income driven by the accounting impact related to hedges on WFC's own issued debt.

For the first time in three years, the net interest margin expanded during the quarter, increasing 2bps in 2Q'15 to 2.97%. The expansion was mainly attributed to balance sheet repricing, growth and mix. It is difficult to tell whether this quarter represents an inflection point or not with regard to continued margin expansion or not for WFC.

WFC reported quarter-end core loan growth of 9% from a year ago. Included in this growth is approximately $11.5 billion from the previously announced GE Capital loan purchase and financing transaction. Excluding this, core loans grew approximately 7.5% from a year ago, mainly attributed to continued broad-based commercial loan growth, as well as nonconforming residential mortgage growth.

WFC redeployed some of this excess liquidity into broad-based loan growth and securities purchases this quarter. Fitch notes that auto loan growth had slowed the prior two quarters due to the company maintaining its underwriting discipline during the competitive market environment, but picked up considerably this quarter as auto loan balances increased roughly $1.5 billion in 2Q'15, up from approximately $550 million the prior two quarters on average.

In addition, deposit balances declined for the first time in almost two years reflecting seasonality in consumer deposits, as well as the repricing deposits in certain Wholesale businesses.
WFC also reported a large decline in short-term investments and fed funds sold, declining 20% on a linked-quarter basis as WFC redeployed excess liquidity into earning asset growth. WFC continued to extend the duration of its balance sheet this quarter as it prepares for the long-end of the curve to remain lower for an extended period of time, despite changes on the short-end.

Market-sensitive revenues, which include gains and losses on equity investments, trading activities, and debt securities, decreased 21% on a linked-quarter basis. These 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.

Mortgage results were sound once again during the quarter with strong origination activity, up 27% sequentially, which was expected given last quarter's ending applications and pipeline. The application and pipeline both fell in 2Q15, which may suggest somewhat weaker mortgage results next quarter.

Expenses were fairly flat on a sequential basis, primarily due to lower employee benefits, which were seasonally higher during the last quarter. However, this was offset by higher operating losses, reflecting additional litigation accruals.

Somewhat unexpected, WFC reported a larger reserve release on a sequential basis of $350 million as compared to just $100 million last quarter. Reserve releases have been generally declining for the industry, including WFC, but increased this quarter due primarily to strong 2Q'15 improvement in residential real estate. WFC reported a $388 million decline in residential mortgage nonaccrual balances. However, this was offset by $416 million increase in C&I nonaccruals, substantially all of which was from the energy sector following the spring borrowing base redeterminations.

Energy-related loans losses have not impacted overall loss rates to date, as overall company quarterly NCOs were just 30bps in 2Q'15. WFC's balance of WFC's oil and gas exposures dropped approximately $700 million following pay downs to conform to borrowing base capacity. Overall O&G loans represent less than 2% of total loans. WFC indicated that its loan loss reserves incorporate potential losses on WFC's oil and gas exposures.

The estimated Common Equity Tier 1 under Basel III Advanced Approach, fully phased-in, remained flat at 10.5% at quarter-end. WFC began using the Advanced Approach, following regulatory approval last quarter. WFC disclosed that capital ratios under the Standardized and Advanced Approaches continue to converge.