OREANDA-NEWS. January 20, 2016. Wells Fargo & Company (WFC) reported fourth quarter 2015 (4Q15) results of \\$5.7 billion in net income for a return on assets (ROA) of 1.27%, down 1.5% from last quarter. Earnings have remained relatively consistent over the last five quarters, hovering at around the \\$5.7 billion mark.

Earnings during the quarter were supported by both spread income and controlled expenses. This was partially offset by higher provision expenses and a large drop in equity gains, which tend to be the most volatile line item in WFC's earnings.

Fitch views these results as in line with expectations for WFC, one of the strongest and most consistent earnings profiles in the industry. The quarter's results were comparatively stronger than big banks reporting to date given the U.S.-based focused franchise and absence of capital markets reliance.

At year-end 2015, WFC's direct exposure to energy lending is modest at less than 2% of total loans. WFC reported \\$118 million in net charge-offs (NCOs) or approximately 2.7% of energy balances on an annualized basis in 4Q15, with \\$843 million of non-accrual balances. WFC also reported one of the highest reserve coverage ratios yet at 7% of oil and gas loans. The reserve was based on customer-by-customer analysis, as well as the forward curve for oil prices, which are higher than current prices of around \\$30.

WFC's balance of energy-related available-for-sale securities and nonmarketable securities was \\$2.5 billion. During the quarter, WFC realized \\$251 million in OTTI primarily reflecting marks on energy sector debt and equity investments.

Spread income increased 1.4% on a linked-quarter basis, primarily supported by growth in loans and securities, as well as higher variable income. Core loan growth was 2% on a linked-quarter basis, while securities balances grew 1%.

WFC's margin fell 4bps due to continued strong deposit growth, as well as higher funding costs as WFC issued more long-term debt in preparation for the previously announced GE capital deals. The GE Railcar Services acquisition closed on Jan. 1, 2016, and it is anticipated that the commercial distribution and vendor finance purchase will close in late 1Q16.

Noninterest income declined 4% primarily due to lower equity gains, partially offset by improved gains on debt securities and trading. Market-sensitive revenues, which include gains and losses on equity investments, trading activities, and debt securities, combined with investment banking fees, were around 6% of total revenues, and can be volatile from quarter to quarter. However, this level of capital markets revenues is well below WFC's large bank peers.

Expenses were flat on a sequential basis, primarily due to higher personnel, equipment and outside professional services, offset by lower operating losses and foreclosed real estate expenses. Furthermore, last quarter included a charitable contribution to the Wells Fargo Foundation that did not repeat. The full-year efficiency ratio was 57.8%, at the higher end of its targeted 55% to 59% efficiency ratio. WFC expects to operate at the higher end of that range in 2016.

For the second quarter in a row, WFC reported the absence of a reserve release with provision expenses equaling NCOs. WFC attributed the lack of a reserve release to continued improvement in residential real estate, offset by deterioration in the energy sector.

Total loan losses ticked up 5bps to a still low 36bps during the quarter due primarily to the previously mentioned energy-related loan losses. Fitch notes that at 36bps, WFC's current losses remain well below historical averages for the company, and we expect some mean reversion for WFC and the industry over the near- to medium-term. Non-accrual balances fell 4% on a linked-quarter basis reflecting broad improvement across consumer and commercial loan categories, offset by energy-related deterioration.

The estimated Common Equity Tier 1 under Basel III Standardized Approach, fully phased-in, was 10.7% at quarter-end, up approximately 5bps on a linked-quarter basis. In terms of potential TLAC issuances, WFC reaffirmed its estimate of between \\$40 billion to \\$60 billion in issuance, which Fitch views as very achievable given an extended phased-in period.