Credit: Wells Fargo was among the banks with the highest projected losses, which is to be expected given that it's the nation's third largest. Over the nine-quarter stretch, the Fed estimates that Wells Fargo would lose $25.2 billion, the vast majority of which stem from loan losses. This goes to show how challenging the test is, as the California-based bank didn't report a single annual loss through the 2008 crisis.Data source: Federal Reserve. Chart by author.
Wells Fargo was among the banks with the highest projected losses, which is to be expected given that it's the nation's third largest. Over the nine-quarter stretch, the Fed estimates that Wells Fargo would lose $25.2 billion, the vast majority of which stem from loan losses. This goes to show how challenging the test is, as the California-based bank didn't report a single annual loss through the 2008 crisis.
2. Source of loan losses
According to the Federal Reserve's projections, Wells Fargo would lose more money from loan losses than any other bank in the country. That includes JPMorgan Chase and Bank of America , both of which have bigger balance sheets than Wells Fargo.
But this shouldn't be taken as a sign that Wells Fargo is a bad risk manager. It's a reflection instead of the fact that it has the country's largest loan portfolio. This distinction becomes clear when you consider that its loan losses equate to 5.4% of its total loans, which is less than the group average of 6.1%.
Where do Wells Fargo's loan losses stem from? As you can see in the chart below, the largest sources are commercial and industrial loans, followed by commercial real estate, and then first-lien residential mortgages.
Data source: Federal Reserve. Chart by author.
3. Capital ratio
This is the most important chart of all, because a bank that's able to satisfy its regulatory capital requirements post-stress test can then seek the Fed's approval to increase its dividends and/or share repurchase program. And, rest assured, Wells Fargo cleared this hurdle.
Data source: Federal Reserve. Chart by author.
As you can see, Wells Fargo entered the test with a common equity tier 1 capital ratio of 11.1% and exited with a 7.2% ratio. That's a meaningful drop, but the latter figure nevertheless exceeded its 5.6% regulatory minimum.
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John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
