Wells Fargo & Co. projected Friday it would experience an overall $17 billion revenue loss if the U.S. economy were to go through a severe downturn during a 2½-year period ending March 31, 2021.
Wells Fargo is among 35 bank holding companies required by the Federal Reserve to do stress-test assessments twice annually. The banks represent more than 80% of domestic banking assets.
However, the Fed chose to exempt some of the smaller super-regional banks, such as BB&T Corp. and SunTrust Banks Inc., from this round of the stress test. The exemption is not related to the banks' planned $66 billion megadeal announced Feb. 7.
The assessments are designed to gauge the potential impact of a severe downturn on bank operations and capital levels as part of the Dodd-Frank financial reform law.
The severe downturn would include: an 8% decline in real gross domestic product from the end of 2018 through the trough of the downturn; a peak unemployment rate of 10% (the current U.S. rate is 3.6%); a 26.4% decline in home prices; a 35% decline in commercial real-estate prices; and a 50% drop in the Dow Jones stock market index.
For the period covered by the latest stress test, Wells Fargo projected having $27.4 billion in net revenue and a loan-loss provision of $35 billion. There also would be $8.7 billion in trading and counter-party losses and $700 million in realized losses on securities and other losses.
The projected losses and net charge-offs again would be spread across several categories totaling $26.1 billion in loan losses.
That includes: $6.4 billion in commercial and industrial loans; $6.4 billion in credit cards; $5 billion “in all other loans”; $3.2 billion in “other consumer loans”; $3 billion in domestic commercial real-estate loans; $1.1 billion in domestic first-lien mortgages; and $1 billion in junior lien and home-equity lines of credit.
The bank said it would have a minimum Tier 1 common ratio of 10.4% and a minimum Tier 1 risk-based ratio of 12.2% under the stress test.
Tier 1 common ratio is a measurement of a bank’s core equity capital compared with its total risk-weighted, risk-based capital ratio of 11.2 percent.
The regulatory minimums are 4.5% for Tier 1 common ratio and 6% for Tier 1 risk-based capital ratio.
Passing the second phase of the stress test qualifies the financial institutions to request approval for their latest capital plans.
Those plans typically seek the authority to increase their dividend payout, expand their share-repurchase program, make a major purchase, or some combination of two or all three.
However, the biggest shadow hanging over Wells Fargo is the Federal Reserve’s order, issued Feb. 3, 2018, that does not allow the bank to increase its total assets beyond the $1.93 trillion it had on Dec. 31, 2017.
Tim Sloan, former chief executive of Wells Fargo, said Jan. 15 that the cap will remain in place through at least the end of 2019.
Fed chairman Jerome Powell, wrote in December that the asset cap will not be removed until the Fed approves the board’s remediation plans, the plans are implemented and an independent review of the improvements is done by a third-party group.
Powell said March 20 he was disappointed with the pace of Wells Fargo’s progress toward that goal, particularly with its risk-management operations.
On April 12, Wells Fargo said it will not provide guidance on when it expects the Fed to lift a total asset cap.
It also will not provide a deadline for when it expects to have a new chief executive in place, or what the board search committee is prioritizing outside hiring an outsider.
Sloan abruptly stepped down as chief executive March 28 after 2½ contentious years in the role following replacing John Stumpf in October 2016.
On May 15, the federal regulator of Wells Fargo told a U.S. Senate Banking committee that it will vet the bank’s next chief executive nominee.
However, Joseph Otting, head of the U.S. Comptroller of the Currency, said the CEO review will not be made public. Otting said the information is considered as “confidential supervisory information” and that “it is my prerogative” to not release the review.
On April 11, the bank said it would not provide a deadline for when it expects to have a new chief executive in place, or what the board search committee is prioritizing other than hiring an outsider.
Allen Parker, the bank’s general counsel, is serving as interim chief executive, but will have a limited role in the search process. There have media reports that the board is considering hiring Parker as the full-time chief executive.
Sloan abruptly stepped down as chief executive March 28 after 2½ contentious years in the role after replacing Stumpf, who was allowed to retire in October 2016.
On Sept. 1, 2017, Wells Fargo confirmed that at least 3.53 million checking and credit-card accounts were affected by the scandal.
Sen. Elizabeth Warren, D-Mass., said during the committee meeting that the OCC “has ducked repeatedly” its supervisory oversight when it comes to Wells Fargo, and that would continue if the chief executive reviews are not made public.