There's No Reason to Stress About Wells Fargohttp://www.fool.com/investing/general/2013/03/06/theres-no-reason-to-stress-about-wells-fargo.aspx John Maxfield
March 6, 2013
If you invest in banks, you probably already know that the Federal Reserve releases the results of the 2013 stress tests tomorrow. As I discussed earlier today when noting that Bank of America (NYSE: BAC) will likely pass the test with flying colors, how banks perform during this stage in their annual regulatory cycle largely dictates whether or not they'll be able to increase the amount of capital they return to shareholders via dividends and/or share buybacks for the remainder of the year. This is why the stress tests are so important.
That being said, with respect to at least some banks, the term "stress test" is a bit of a misnomer. In other words, there's little question that certain banks will sail through the process without anything to worry about. If the title of this article didn't already give it away, Wells Fargo (NYSE: WFC), the nation's fourth largest bank by assets, is one such bank.
A brief introduction to stress tests
When subjected to a similar set of assumptions last year, the vast majority of banks passed the test with ease. In Wells Fargo's case, its Tier 1 common capital ratio fell from 9.34% of risk-weighted assets down to 6.6%, well in excess of the required 5% rate. As you can see here, this placed it in the middle of its peer group, or 8th out of the 19 banks tested. While it was the best-performing of the four so-called too-big-to-fail banks, it was beaten out by American Express, the custodial banks State Street and Bank of New York Mellon, and a smattering of regional lenders including Fifth Third Bancorp (NASDAQ: FITB), U.S. Bancorp (NYSE: USB), and BB&T (NYSE: BBT). The latter three, for instance, ended up with Tier 1 common capital ratios of 7.7%, 7.7%, and 7.3%, respectively.
Given that Wells Fargo's capital levels have since increased, it seems safe to assume that it'll sail past the tests this year even more comfortably. At the end of the third quarter in 2011, its Basel I Tier 1 common capital ratio was 9.34%. By the end of the third quarter last year, this had