The nation's fourth largest bank by assets has proven itself again. Yesterday, the Federal Reserve released its most recent round of stress tests showing that Wells Fargo (NYSE:WFC) has once again outperformed its too-big-to-fail brethren, JPMorgan Chase, Bank of America, and Citigroup. The charts and discussion below examine how the company's capital and earnings held up under the Fed's "severely adverse" economic scenario.
The purpose of the stress tests is to gauge how the capital bases of the nation's largest financial institutions hold up in the face of economic and financial turmoil. Among other things, the most extreme case assumes that real GDP declines an average of 4% this year, unemployment ratchets up to 12.1% by the second quarter of next year, and that home prices plummet by 20% over the next 24 months.
As you can see in the chart below, Wells Fargo's Tier 1 common capital ratio held up well in light of these assumptions. Starting from 9.9% at the end of last September, it bottomed out at 7% over the hypothetical time period extending from the fourth quarter of last year through the end of 2014. While that equates to a 29% decline, the ending figure nevertheless far exceeded the Fed's 5% reference rate. By comparison, the average Tier 1 common capital ratio of the 18 institutions tested fell by a third, down to 7.4%.
With respect to net income, Wells Fargo didn't fare quite as well -- though it still outperformed the three other megabanks. Its hypothetical pre-tax loss for the nine-quarter time period came in at $25.7 billion. This was more than double the 18-institution average loss of $10.8 billion, but roughly half the hypothetical $51.7 billion loss at Bank of America. Conversely, the Bank of New York Mellon fared the best, with $5.5 billion in earnings despite the assumed economic Armageddon.
Breaking this down a bit further, as you can see in the figure above, Wells Fargo's $45.9 billion in pre-provision net revenue was more than consumed by loan loss provisions -- that is, money set aside to cover future losses from soured loans. These accounted for $58.8 billion in losses. In addition, estimated losses from trading added up to $6.9 billion, and other losses ate up an additional $5.9 billion.
And digging into the loan losses specifically, Wells Fargo's were widely dispersed among customer and product types. A full 45% derived from residential real estate, 19% from other types of consumer loans, and a total of 36% from various types of commercial lending.
At the end of the day, the stress tests are meant to do exactly what the name implies: stress you out. The good news, however, is that once again, Wells Fargo has demonstrated that it is perhaps truly the only big bank built to last.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. 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.