What happened
Shares of Wells Fargo (NYSE: WFC) were nearly 8% higher as of 11:51 a.m. ET today after the Federal Reserve released results from its annual stress-testing exercise last night, which came out favorably for Wells Fargo.
So what
Every year, the Fed puts the largest U.S. banks through a hypothetical severely-adverse economic scenario to see how they would hold up, in order to ensure the safety and soundness of the banking system. The testing also helps the Fed set minimum capital requirements for banks, which plays a role in determining how much capital they can return to shareholders.
In the scenario this year, which is meant to take place between the fourth quarter of 2021 and the first quarter of 2024, Wells Fargo would see its common equity tier 1 (CET1) capital ratio, a measure of a bank's core capital expressed as a percentage of its risk-weighted assets such as loans, fall from 11.4% to 8.6%.
During the nine-quarter period, the Fed also projects that Wells Fargo would incur more than $53 billion of loan losses and see a loss of more than $29 billion before taxes.
Jefferies analyst Ken Usdin called Wells Fargo a "relative winner" because the results mean that a portion of the bank's CET1 ratio will hold steady from last year or maybe even decline. The bank is expected to provide more information Monday.
Now what
This is definitely good news for Wells Fargo. The bank was already sitting on a lot of capital, but chief financial officer Mike Santomassimo recently said the bank has not repurchased stock in the current quarter, due to the volatile environment.
The clarity from stress testing could enable Wells Fargo to resume share repurchases next quarter or raise its dividend. The bank will likely announce its capital return plans on Monday.
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