Wells Fargo & Co. feels "quite prepared" with its capabilities for handling the impending loan loss accounting standard, CFO John Shrewsberry said during the bank's third-quarter earnings call on Oct. 12.
Wells Fargo executives are in the process of discussing with accountants and regulators how the new accounting standard, called the current expected credit loss model, or CECL, will affect the bank's allowance for loan and lease losses.
The CECL will change when banks book losses from the current approach of when a loss becomes probable to when the loan is made, covering its entire life.
Shrewsberry said Wells Fargo will disclose the CECL's expected impact on its allowance in 2019, ahead of the standard's 2020 effective date. The standard "tends to increase" the calculated allowance for consumer loans and "tends to decrease" the calculated allowance for commercial loans, Shrewsberry said.
The difference between the two comes from the shorter terms associated with commercial lending and a shift from the bank's previous "emergence period approach," in which it anticipated a certain amount of renewals, he said.
The new standard has yet to create a shift in lending competition, either in loan terms or in pricing, but those effects could be felt as more banks quantify the CECL's impact, Shrewsberry said.
It is also unclear how regulators will include the new standard in the Comprehensive Capital Analysis and Review, and whether its inclusion will be "incrementally punitive," he said. The CECL could be a "doubling up" of the big, front-end loss in 2020 for banks undergoing the CCAR, Shrewsberry said, especially as they build theoretical reserves for nine quarters of losses in various stressed economic scenarios.
Wells Fargo reported third-quarter net income applicable to common stock of $5.45 billion, or $1.13 per share, up from net income of $4.13 billion, or 83 cents per share, in the third quarter of 2017.