Wells Fargo "Little Jack Horner" of big banks

Wells, B of A: A Tale of Two Capital Ratios


If the financial industry were made up of nursery rhymes, Wells Fargo & Co. would be Little Jack Horner and Bank of America Corp. would be regarded as Pinocchio.

As evidenced by the reaction to the two banks' second-quarter results on Tuesday, Bank of America is plagued by a lack of credibility among analysts and investors. That's a problem Wells Fargo, which continues to pull out plum earnings, has been able to avoid.

The divergence in the two banks' bottom line results was stark. Wells Fargo had record earnings, while Bank of America reported a big net loss. Both banks continued to feel the brunt of the sluggish economic rebound, reporting anemic revenue.

The primary concern for analysts and investors, though, seemed to revolve around capital levels, a subject of ongoing consternation and confusion. Though banks have until 2019 to meet Basel III requirements, there is still some uncertainty over how the requirements will be phased in for each bank, and the effect of future economic setbacks on those capital levels. Here is where the differences between B of A and Wells might be most profound.


[Bank of America] expects to have a tier 1 common ratio between 6.75% and 7% by January 2013, well above Basel III capital requirements of 3.5% for that time.

Wells, on the other hand, now estimates that its tier 1 capital under Basel III rules stands at 7.4%, growing quarter over quarter despite a return to paying out dividends and buying back shares.

Comment: Little Jack Horner source. Pinocchio source

He put in his thumb,
And pulled out a plum,
And said 'What a good bank am I!

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