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Will Wells Fargo Alter Its Underwriting Guidelines for Its Loan Book?

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Feb. 12 2018, Updated 7:32 a.m. ET

Strict underwriting guidelines

Wells Fargo (WFC) has increased its focus on maintaining the quality of its loan book rather than seeking aggressive expansion. This strategy has gained more strength after its fake account opening scandal and the related fallout within the company.

These guidelines have resulted in almost no growth in total loans, with average loans declining 1.0% on a YoY (year-over-year) basis in 2017. As corporates seek lower leverage amid rising rates, Wells Fargo could face further difficulty in improving its lending unless there is a pickup in the real estate sector.

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Wells Fargo has seen its asset quality improve with non-accrual loans declining to $8.0 billion in 4Q17 compared to $10.4 billion in 4Q16. This trend reflects lower risk-weighted assets and higher Tier 1 capital ratios. In comparison to its loan book, the bank’s non-accrual loans are lower than 0.90%.

The Dodd-Frank Act

The Trump administration is seeking amendments in the Dodd-Frank Act in a bid to push for reduced regulations for banks and insurance companies. This could benefit US banks at least in the medium term in the way they deploy capital and capital adequacy requirements.

Another macro factor, oil prices (USO), helped lower non-performing assets for US banks including for Capital One (COF), Bank of America (BAC), and JPMorgan Chase (JPM). Oil prices are expected to remain strong in 2018 due to demand from China and India as well as improved manufacturing activity across Asia, Europe, and the Americas.

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