Wells Fargo and Bank of America, two of America’s four largest banks (along with Citibank and JPMorgan Chase) and two of California’s most important institutions, both announced third-quarter (July 1–Sept. 30) results on Oct. 14.
The minutia you won’t read elsewhere: The capital ratios and asset quality of both banks are very strong. The data indicates that within the caution caused by the current pandemic, there’s otherwise plenty of capital for the banks to lend, if California businesses and households wanted to borrow.
Wells Fargo shares fell 6 percent on Oct. 14 because it has to limit how big it can grow so that it doesn’t become even more “too big to fail.” It isn’t allowed to have more than $1.75 trillion in assets and is getting close to that number, so it has to do things to throttle its growth.
The bank has set aside about $1 billion for payments to remediate customers for previous bad behavior and took restructuring charges of $718 million mostly related to severance payments to laid-off workers.
Amid these issues, consumers can cheer that Wells Fargo’s Common Equity Tier 1 capital ratio is at 11.4 percent, which is well above the 9 percent demanded by bank regulatory authorities and management’s stated target of 10 percent. The capital ratio compares how much common equity backs the risk-adjusted size of Wells Fargo’s assets.
Having too much equity capital means that, all else equal, Wells Fargo can either grow or move into more risky lending or give capital back to shareholders.
Since it can’t grow, it will likely either eventually return capital to shareholders or move into more risky lending, which means it might have capacity to lend to smaller businesses or startup businesses.
Equally important is that Wells Fargo set aside far fewer assets to cover any losses that might occur if borrowers don’t repay their loans. Such so-called loan-loss provisions are the best indication of management’s expectation for future non-payment on loans. Wall Street analysts had expected Wells Fargo to set aside $1.65 billion during the quarter for such future losses, according to Bloomberg.com. Instead, Wells Fargo set aside $769 million.
When a bank’s borrowers are paying back their loans, the bank has far more options: They can increase pricing (interest rates) on those borrowers, move them into other banking services, and so on. And, of course, more profits could mean more possible future dividends.
Of course, whether Wells Fargo chooses to lend or return capital will depend on the expected risk-reward calculus at the time, but such lending, which would be important for restarting the California economy, would benefit from having a local connection such as a well-capitalized, large bank that might be making such decisions.
Bank of America
As for Bank of America, which was founded in California and is now based in Charlotte, North Carolina, due to a series of historical mergers, its shares fell 5 percent on Oct. 14. The company said its consumer banking revenue was down 17 percent from when and profits from Wall Street trading activity was up by less than how much it had improved among its big-bank peers.
However, as with the details within the Wells Fargo release, there are details within Bank of America’s release that might cause cheer for economists looking to the future of the overall economy. Loan-loss provisions during the period were $1.39 billion, about 25 percent below the $1.86 billion expected by Wall Street analysts cited by Bloomberg.com.
The bank’s Common Equity Tier 1 capital ratio was 11.9 percent at the end of the quarter, also far above the minimum required by regulators.
California consumers can be relieved that its two largest indigenous banks are well-capitalized and currently see a less-than-expected need to provide for future loan losses.
While there are many unknowns—the future course of aid to small businesses, the course of government programs keeping renters and mortgage borrowers in their homes, whether there might be more shelter-in-place measures instituted, and many other factors—this is a positive start to earnings season.
We will report more results as other banks, including regional financial institutions, report their results over the next few weeks.
Tim Shaler is a professional investor and economist based in Southern California. He is a regular columnist for The Epoch Times, where he exclusively provides some of his original economic analysis.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.