Wells Fargo (WFC) remains one of the more solid banks with its current investment grade rating. But the mega bank still faces uncertainty from exposures to mortgage servicing rights, second-lien loans and mortgage-backed securities, Fitch Ratings said this week.
Fitch affirmed Wells Fargo’s rating at its current AA- investment grade rating.
The solid rating is attributed to the company’s earnings profile, capital ratio and current liquidity position. But Wells Fargo’s growing concentration in the residential-mortgage market remains a concern for Fitch.
Not to mention, the firm’s handling of mortgage servicing rights also could be affected by new Basel III requirements. The proposed Basel III capital requirements for banks stipulate that mortgage servicing rights can only account for up to 10% of common equity when determining a bank’s ability to comply with Tier 1 capital guidelines. Under the new rule, banks about to approach the 10% threshold would have to either stop buying MSRs or price the underlying loans to account for the reduction in capital, the Mortgage Bankers Association recently warned.
Fitch has similar concerns about Wells Fargo’s MSRs.
“As of Sept. 30, 2012, WFC was not over the threshold for MSRs under Basel III; however, when rates rise, the value of MSRs should presumably rise given the expectation of lower prepayment speeds,” Fitch said. “As MSRs increase in value, deductions to capital ratios may result and adversely impact capital ratios. Fitch already deducts 100% of MSRs in its calculations of Fitch Core Capital.”
Changes to how MSRs are calculated could prompt Wells Fargo to maintain a stronger capital buffer and pursue other options like the sale of servicing assets or a move away from third-party lending channels, Fitch said.
