Wells Fargo 2014 Annual Report Download - page 117

including concerns about deficit levels, taxes and U.S. debt
ratings, have impacted and may continue to impact the
continuing global economic recovery. Moreover, geopolitical
matters, including international political unrest or disturbances,
as well as continued concerns over energy prices and global
economic difficulties, may impact the stability of financial
markets and the global economy. A prolonged period of slow
growth in the global economy, particularly in the U.S., or any
deterioration in general economic conditions and/or the
financial markets resulting from the above matters or any other
events or factors that may disrupt or dampen the global
economic recovery, could materially adversely affect our
financial results and condition.
The improvement in the U.S. economy as well as higher
home prices contributed to our strengthened credit performance
and allowed us to release amounts from our allowance for credit
losses, however there is no guarantee we will have allowance
releases in the future. If unemployment levels worsen or if home
prices fall we would expect to incur elevated charge-offs and
provision expense from increases in our allowance for credit
losses. These conditions may adversely affect not only consumer
loan performance but also commercial and CRE loans, especially
for those business borrowers that rely on the health of industries
that may experience deteriorating economic conditions. The
ability of these and other borrowers to repay their loans may
deteriorate, causing us, as one of the largest commercial lenders
and the largest CRE lender in the U.S., to incur significantly
higher credit losses. In addition, weak or deteriorating economic
conditions make it more challenging for us to increase our
consumer and commercial loan portfolios by making loans to
creditworthy borrowers at attractive yields. Although we have
significant capacity to add loans to our balance sheet, weak
economic conditions, as well as competition and/or increases in
interest rates, could soften demand for our loans resulting in our
retaining a much higher amount of lower yielding liquid assets
on our balance sheet. If economic conditions do not continue to
improve or if the economy worsens and unemployment rises,
which also would likely result in a decrease in consumer and
business confidence and spending, the demand for our credit
products, including our mortgages, may fall, reducing our
interest and noninterest income and our earnings.
A deterioration in business and economic conditions, which
may erode consumer and investor confidence levels, and/or
increased volatility of financial markets, also could adversely
affect financial results for our fee-based businesses, including
our investment advisory, mutual fund, securities brokerage,
wealth management, and investment banking businesses. In
2014, approximately 26% of our revenue was fee income, which
included trust and investment fees, card fees and other fees. We
earn fee income from managing assets for others and providing
brokerage and other investment advisory and wealth
management services. Because investment management fees are
often based on the value of assets under management, a fall in
the market prices of those assets could reduce our fee income.
Changes in stock market prices could affect the trading activity
of investors, reducing commissions and other fees we earn from
our brokerage business. The U.S. stock market experienced all-
time highs in 2014 and there is no guarantee that those price
levels will continue. Poor economic conditions and volatile or
unstable financial markets also can negatively affect our debt
and equity underwriting and advisory businesses, as well as our
trading and venture capital businesses. Any deterioration in
global financial markets and economies, including as a result of
any international political unrest or disturbances, may adversely
affect the revenues and earnings of our international operations,
particularly our global financial institution and correspondent
banking services.
For more information, refer to the “Risk Management –
Asset/Liability Management” and “– Credit Risk Management”
sections in this Report.
Changes in interest rates and financial market values
could reduce our net interest income and earnings,
including as a result of recognizing losses or OTTI on
the securities that we hold in our portfolio or trade for
our customers. Our net interest income is the interest we
earn on loans, debt securities and other assets we hold less
the interest we pay on our deposits, long-term and short-term
debt, and other liabilities. Net interest income is a measure of
both our net interest margin – the difference between the yield
we earn on our assets and the interest rate we pay for deposits
and our other sources of funding – and the amount of earning
assets we hold. Changes in either our net interest margin or the
amount or mix of earning assets we hold could affect our net
interest income and our earnings. Changes in interest rates can
affect our net interest margin. Although the yield we earn on our
assets and our funding costs tend to move in the same direction
in response to changes in interest rates, one can rise or fall faster
than the other, causing our net interest margin to expand or
contract. Our liabilities tend to be shorter in duration than our
assets, so they may adjust faster in response to changes in
interest rates. When interest rates rise, our funding costs may
rise faster than the yield we earn on our assets, causing our net
interest margin to contract until the asset yield increases.
The amount and type of earning assets we hold can affect
our yield and net interest margin. We hold earning assets in the
form of loans and investment securities, among other assets. As
noted above, if the economy worsens we may see lower demand
for loans by creditworthy customers, reducing our net interest
income and yield. In addition, our net interest income and net
interest margin can be negatively affected by a prolonged low
interest rate environment, which as noted below is currently
being experienced as a result of economic conditions and FRB
monetary policies, as it may result in us holding short-term
lower yielding loans and securities on our balance sheet,
particularly if we are unable to replace the maturing higher
yielding assets, including the loans in our non-strategic and
liquidating loan portfolio, with similar higher yielding assets.
Increases in interest rates, however, may negatively affect loan
demand and could result in higher credit losses as borrowers
may have more difficulty making higher interest payments. As
described below, changes in interest rates also affect our
mortgage business, including the value of our MSRs.
Changes in the slope of the “yield curve” – or the spread
between short-term and long-term interest rates – could also
reduce our net interest margin. Normally, the yield curve is
upward sloping, meaning short-term rates are lower than long-
term rates. Because our liabilities tend to be shorter in duration
than our assets, when the yield curve flattens, as is the case in
the current interest rate environment, or even inverts, our net
interest margin could decrease as our cost of funds increases
relative to the yield we can earn on our assets.
The interest we earn on our loans may be tied to U.S.-
denominated interest rates such as the federal funds rate while
the interest we pay on our debt may be based on international
rates such as LIBOR. If the federal funds rate were to fall without
a corresponding decrease in LIBOR, we might earn less on our
loans without any offsetting decrease in our funding costs. This
could lower our net interest margin and our net interest income.
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