Wells Fargo takes $112m CVA hit in 2018

Trading revenues decline $54 million overall through derivatives adjustments

Derivatives valuation adjustments (XVAs) wiped out 9% of Wells Fargo’s trading revenues in 2018.

The San Francisco-based dealer posted annual trading revenues of $602 million. This total would have been $54 million higher, though, had XVAs not cut into the value of its derivatives assets.

Credit valuation adjustments (CVAs) took a $112 million bite out of trading revenues over the year. This was only partly offset by debit valuation adjustments (DVAs), which added $58 million to trading revenues.

The fair value of Wells Fargo’s derivatives trading assets were $9.4 billion at end-2018, and derivatives trading liabilities $7.5 billion.

In contrast, other large US dealers posted net gains to trading revenues because of XVAs. JP Morgan posted a $326 million gain, equivalent to 4% of total trading revenues of $8.8 billion. Citi reported a $82 million gain, around 1% of total revenues of $7.7 billion; BofA Securities a $132 million gain, about 2% of total revenues of $8.6 billion; and Goldman Sachs a $371 million gain, or 3% of total revenues of $12.6 billion.

Morgan Stanley does not report XVA adjustments, but posted annual trading revenues of $8.3 billion. 

Update, March 14, 2019: A Wells Fargo spokesperson said: "The FR Y-9C data shows the actual CVA/DVA balances of the derivatives portfolio, however these values do not reflect the constant CVA hedging activity of an actively managed portfolio with new client activity, so in and of themselves are not an indicator of overall financial performance."

What is it?

CVA is an amendment to the value of a derivatives asset to reflect the chance that the dealer’s counterparty will default. If a counterparty’s credit condition deteriorates, there is a higher chance that it will default on future payments mandated under the derivatives contract. This risk is factored in as a deduction to that asset’s fair value. This deduction shrinks if a counterparty’s credit improves, as it becomes more likely it will honour its obligations.  

DVA influences the value of a dealer’s derivatives liabilities in line with the creditworthiness of the dealer itself. As its own credit risk deteriorates, the value of its derivatives liabilities shrinks, as it becomes less likely it will fulfil ongoing payments to its counterparties. On the flip side, as credit risk improves, the liabilities grow. 

The XVA data is taken from the Federal Reserve’s FR Y-9C forms, which are used to assess and monitor the financial condition of US banks. The FR Y-9C obliges firms to disclose the calendar year-to-date impact on trading revenue due to CVA in line item M9(f) and that due to DVA in line item M9(g), if they have $100 billion or more in total assets. 

Why it matters

A sharp decline in the creditworthiness of Wells Fargo's derivatives counterparties in the last three months of 2018 appears to have caused the bulk of the XVA hit to trading revenues. Over the first nine months of last year, CVA sapped just $26 million from trading revenues of $592 million. This means in the last three months of the year the overall credit risk of its counterparty roster increased dramatically.

Whether this was because a single counterparty swiftly and suddenly deteriorated or a number of counterparties shifted closer to default is unknown. The big hit to revenues, though, may spur the bank to revise its counterparty roster and finesse its CVA hedging strategy to avoid similar losses in the future. 

Wells Fargo has a much smaller trading book than its Wall Street rivals, but has ambitions to expand. Perhaps the XVAs hit for 2018 is one manifestation of its growing pains.

Get in touch

How come Wells Fargo but no other bulge-bracket dealer leaked revenues because of XVA effects in 2018? Share your thoughts by emailing [e-mail], tweeting @LouieWoodall or messaging on LinkedIn. 

Keep up with the Quantum team by following @RiskQuantum. 

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