Wells Fargo's mortgage servicing rights portfolio could have an impact on the bank's capital ratios under the Basel III requirements in the not-so-distant future when interest rates rise, a report from Fitch Ratings warns.
Fitch affirmed Wells Fargo's ratings and stable outlook following the release of second-quarter earnings.
As of March 31, Wells Fargo was under the threshold for MSRs under Basel III. But when mortgage interest rates start to rise and prepayment speeds slow, that should increase the value of the MSRs.
"As MSRs increase in value, deductions to capital ratios will take effect, and adversely impact capital ratios. Wells Fargo is considering potential strategies for dealing with the MSR cap under Basel III, including servicing sales and de-emphasizing third-party lending channels. As a result of the different treatment of MSRs and the inclusion of other comprehensive income under Basel III, Fitch expects Wells Fargo to maintain an appropriate capital buffer to withstand the related volatility in capital ratios," the ratings agency said.
Last week, Wells Fargo announced it was exiting the wholesale production channel. It is also reducing the number of joint ventures it has with Realtors.
Things that could influence Fitch's view of Wells Fargo is if the capital implications related to MSRs "become outsized relative to peers under Basel III," it fails to lessen its concentration in the mortgage business, and the effects of large-scale reforms in the mortgage industry.