There’s No Reason to Stress About Wells Fargo & Co (WFC): U.S. Bancorp (USB), BB&T Corporation (BBT)

Page 1 of 2

If you invest in banks, you probably already know that the Federal Reserve releases the results of the 2013 stress tests tomorrow. As I discussed earlier today when noting that Bank of America Corp (NYSE:BAC) will likely pass the test with flying colors, how banks perform during this stage in their annual regulatory cycle largely dictates whether or not they’ll be able to increase the amount of capital they return to shareholders via dividends and/or share buybacks for the remainder of the year. This is why the stress tests are so important.

That being said, with respect to at least some banks, the term “stress test” is a bit of a misnomer. In other words, there’s little question that certain banks will sail through the process without anything to worry about. If the title of this article didn’t already give it away, Wells Fargo & Co (NYSE:WFC), the nation’s fourth largest bank by assets, is one such bank.

Wells Fargo & Co (NYSE:WFC)A brief introduction to stress tests
As I discussed earlier:

In the wake of the financial crisis, Congress enacted the Dodd-Frank Act, which requires the Federal Reserve to conduct stress tests of banks and other financial concerns with assets in excess of $50 billion. The purpose is to evaluate whether these so-called too-big-to-fail institutions have, as the Fed describes it, “sufficient capital, on a total consolidated basis, to absorb losses as a result of adverse economic conditions.”

The process seeks to simulate the impact on a bank’s regulatory capital levels under three hypothetical and increasingly severe economic scenarios. The most arduous assumes that real GDP declines an average of 4% this year, the unemployment rate ticks up to 12.1% in the second quarter of next year, and that home prices fall by more than 20% by the end of 2014. Suffice it to say, this is an extreme case. As the Fed notes, at least with respect to unemployment, the designated rate remains “above any level experienced over the last 70 years” — that is, since the Great Depression.

When subjected to a similar set of assumptions last year, the vast majority of banks passed the test with ease. In Wells Fargo & Co (NYSE:WFC)’s case, its Tier 1 common capital ratio fell from 9.34% of risk-weighted assets down to 6.6%, well in excess of the required 5% rate. As you can see here, this placed it in the middle of its peer group, or 8th out of the 19 banks tested. While it was the best-performing of the four so-called too-big-to-fail banks, it was beaten out by American Express Company (NYSE:AXP), the custodial banks State Street Corporation (NYSE:STT) and The Bank of New York Mellon Corporation (NYSE:BK), and a smattering of regional lenders including Fifth Third Bancorp (NASDAQ:FITB), U.S. Bancorp (NYSE:USB), and BB&T Corporation¬†(NYSE:BBT). The latter three, for instance, ended up with Tier 1 common capital ratios of 7.7%, 7.7%, and 7.3%, respectively.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!