Fed Approves Wells Fargo's Capital Plan -- Update

By Emily Glazer 

The Federal Reserve approved Wells Fargo & Co.'s capital plan in the regulator's annual stress test released Wednesday.

Wells Fargo's plan was approved after the Fed found that the largest U.S. bank by market value could keep lending in a severe economic downturn. The approval clears the way for the San Francisco-based firm to reward investors by returning capital -- either through dividend payouts or buying back stock, or both.

The bank later in the day reiterated its previously disclosed 38 cent dividend and didn't give any update on share repurchases.

The bank, along with several others, is expected to unveil plans on its quarterly dividend and share repurchase activity later in the day.

At the low point of a hypothetical recession, Wells Fargo's common equity Tier 1 ratio -- which measures high-quality capital as a share of risk-weighted assets -- would be 6.1%, above the 4.5% level the Fed views as a minimum. The new ratio, unlike the one reported last week by the Fed in a related test, takes into account the bank's proposed capital plan.

Wells Fargo's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, would have reached as low as 5.8% in a hypothetical recession, above the 4% Fed minimum.

The latest stress-test result incorporates quantitative factors assessed in data released by the Fed last week. These included a simulation of how the bank's capital buffers would hold up under a world-wide recession. The Fed's "severely adverse" scenario of financial stress this year included a 10% U.S. unemployment rate, significant losses in corporate and commercial real-estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

This second-part of the test also included a qualitative assessment by the Fed of a bank's capital-planning process and internal controls. The Fed has the ability to object to a bank's capital plan on either quantitative or qualitative grounds.

The Fed's Wednesday results are arguably the more important part of the stress-test process since it dictates how much capital will be returned to shareholders. Increased dividends and buybacks can help to bolster a bank's share price.

Wells Fargo also passed last year but certain capital and leverage results were down more than 0.5 percentage points from its year-earlier results.

Bernstein bank analyst John McDonald wrote in a June note that banks including Wells Fargo are "less likely to be viewed as relative winner since they have less room for upside -- either because they are already at the higher end of distributions, they already announced dividend increases recently, and/or they have a practice of not disclosing their buyback authorizations."

But, he wrote, Wells Fargo is among the U.S. banks expected to have the highest total payout and dividend yields.

Wells Fargo has doled out much higher dividends and buybacks than other big banks, making it more attractive for investors. For example, Wells Fargo paid out dividends and bought back stock equal to 75% of its net income last year. Bank of America Corp. was at about 31%, while Citigroup Inc. was around 36%. Wells Fargo recently raised its dividend to 38 cents a quarter, higher than before the financial crisis.

Wells Fargo has also expanded more than 37% since it bought Wachovia in 2008, taking on assets and adding new businesses to its core Main Street franchise of lending and deposits.

Most notably, Wells Fargo last year agreed to scoop up parts of the finance arm of General Electric Co., a unit that was unwinding as a precaution against tighter regulations on big banks. It is the third-biggest U.S. bank by assets now.

But it hasn't been all smooth sailing. The bank was the only one flagged for "material errors" in its submission of the "living wills," where regulators weigh in on banks' plans for navigating a potential bankruptcy. In April, regulators said the bank needed to significantly revise its plan, a surprise in part because the last time regulators tackled this issue they said Wells Fargo was the sole bank to lay out a viable bankruptcy path.

Write to Emily Glazer at [e-mail]

(END) Dow Jones Newswires

June 29, 2016 19:06 ET (23:06 GMT)

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