Federal Reserve has confirmed that Wells Fargo has enough total capital even in a severe economic stress scenario. Both the Company’s and the Federal Reserve’s analysis indicate the Company would remain well above the 6% minimum Tier 1 capital ratio needed for well capitalized banks over the next two years even under stress conditions. The Company’s Tier 1 capital ratio as of 3/31/09 was 8.3% after a reduction of approximately 190 basis points for credit-related, purchase accounting write-downs taken by Wells Fargo upon the Wachovia acquisition.
The Federal Reserve requires that the preponderance of Tier 1 capital be maintained in common equity, which is defined as 4% of risk weighted assets for purposes of the stress test. The Company’s own projection of its downside risk under the stress test scenario indicated sufficient Tier 1 common equity to meet this test, but the Federal Reserve has elected to apply its own more conservative revenue assumptions in the adverse case scenario and has asked Wells Fargo to increase Tier 1 common equity by $13.7 billion by November 9, 2009.
“We’re very pleased that the Federal Reserve’s comprehensive credit analysis confirmed our own estimates of potential credit losses in the aggregate across all of our loan portfolios,” said Chief Financial Officer Howard Atkins. “This is not surprising since the higher risk Wachovia loan and securities portfolios have already been written down and since banking regulators have previously reviewed legacy Wells Fargo and legacy Wachovia credit portfolios while the Company has reviewed Wachovia’s loans at least five times since the Wachovia merger was announced.
“The main reason the Federal Reserve has required Wells Fargo to hold an extra $13.7 billion in Tier 1 common equity is based on what we believe is their excessively conservative estimate of pre-provision net revenue (PPNR) in the adverse scenario. Since we believe our Company’s earnings and other internally-generated capital will generate enough capital to meet the 4% test by November 9, 2009, in effect the Federal Reserve is asking Wells Fargo to hold a significant capital cushion above 4% for a hypothetical net revenue scenario that is remote and inconsistent with the Company’s strong actual results so far in 2009, strong underlying earnings momentum, and the actions already taken by Wells Fargo to reduce Wachovia’s revenue risk.
“Wells Fargo’s revenue growth the past two decades has been about double that of the industry. Even during the current economic downturn, the Company had double-digit revenue growth in eight of the last 12 quarters. Legacy Wells Fargo grew revenue 16% last quarter and customers are bringing business back to legacy Wachovia, representing 41% of the combined company’s revenue last quarter.
“Furthermore, Wells Fargo’s pre-provision earnings in the first quarter of 2009 were above its own submission to the Federal Reserve and approximately 25% higher than the quarterly average PPNR assumed by the Federal Reserve in its adverse case scenario.
“Wells Fargo would be well above the Tier 1 common equity target of 4% today if it had not written off almost $40 billion of troubled loans from Wachovia Corporation when the merger of Wachovia into Wells Fargo was completed at the end of last year. This reduced the ratio of Tier 1 common equity to risk-weighted assets by about 190 basis points. By writing off those troubled loans last year, however, the Wachovia portion of Wells Fargo’s losses has been significantly reduced, supporting profitability and our ability to add to common equity over time. Over $13 billion of this benefit is expected to remain at the end of 2010 when the stress test period is over.”
D.C.