Two main indicators of capital strength
Tier 1 capital ratio is one of the most important indicators of capital strength and risks in banking. Tier 1 capital ratio is a bank’s core equity as a percentage of risk-weighted assets.
A minimum Tier 1 capital is an essential regulatory requirement. All banks in the Financial Select Sector SPDR (XLF) portfolio are required to maintain a minimum Tier 1 capital.
Wells Fargo is well positioned in capital strength
Wells Fargo’s (WFC) equity Tier 1 ratio under Basel III requirements stood at 11.04% at the end of 4Q14. This was a decline of 7 basis points compared to 3Q14.
There’s one more approach to measuring capital. It’s the more stringent advanced approach to measure capital under Basel III. Even under this approach, Wells Fargo had a strong capital position.
Wells Fargo’s (WFC) Tier 1 capital under advanced approach was 10.44% at the end of 4Q14. The advanced and standardized approaches are converging. In a few years, we should see little difference between these approaches as banking standards evolve.
If you look at the above chart, you’ll see that Wells Fargo’s Tier 1 capital declined in 2014. However, this is not an indicator of weakness. Wells Fargo held capital far in excess of regulatory requirements at the end of 2013. The bank shed some of this excess capital in 2014. The excess capital was put to more productive uses in 2014, which is a positive for the bank.
Wells Fargo is one of the best capitalized banks
Wells Fargo is one of the best capitalized banks in the United States. It has higher capital than Bank of America (BAC), JPMorgan (JPM), and Citibank (C). The bank is at an advantage because it has a lower regulatory capital requirement due to a smaller investment banking operation and a lower international presence.