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Wells Fargo’s Credit Offtake, Deposits, and Quality Drivers

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Credit offtake

Wells Fargo’s (WFC) loan book expanded consistently in 2016 and witnessed a marginal decline in 1Q17. The bank’s total loan book stood at $958 billion as of March 31, 2017—a fall of $9.2 billion compared to the previous quarter. The decline has been due to lower credit card balances, new originations of auto loans, and a decline in junior lien mortgage loans. Out of the total loan book, commercial lending formed $505 billion and consumer lending contributed $453 billion, which reflected a balanced and diversified book. Wells Fargo has seen a YoY (year-over-year) rise in commercial lending by $17 billion and a decline of $6 billion in consumer lending.

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Deposits, capital, and asset quality

Wells Fargo managed deposits totaling $1.3 trillion as of March 31, 2017—a rise of 1% on a YoY basis due to business expansion and commercial contribution. The bank maintained an equity tier 1 ratio of 11.2%—compared to 10.8% in the previous quarter. The bank’s net loan charge-offs for commercial loans fell to $143 million or 0.11% of the total portfolio—compared to $251 million or 0.20% in the previous quarter, which showed improvements in real estate mortgage and construction. However, its consumer loan charge-offs rose to $662 million or 0.59%—compared to $654 million or 0.56% in the previous quarter.

In upcoming quarters, Wells Fargo’s credit quality is expected to remain steady mainly due to increased corporate earnings helped by macro fundamentals inside and outside the US. Other commercial banks (XLF) including JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) also saw their asset quality improve since the beginning of 2016.

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