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Wells Fargo living will rejection, sanctions largely immaterial, say analysts

Wells Fargo & Co. fell 2.14% to $54.64 in morning trading Wednesday, Dec. 14, following news that regulators rejected the banking giant's resolution plan.

Wells faces restrictions on its international and nonbank businesses after failing to fix issues with its 2015 resolution plan. The Federal Reserve and the FDIC noted that the company failed to "adequately remedy all of its deficiencies." As a result, the regulators have decided to limit the bank's ability to establish international bank entities or acquire nonbank subsidiaries.

The analyst community's reaction was muted. Several reports suggested that the sanctions and living will rejection will not have a material impact on Wells, though these actions could offer clues about how regulators will treat the bank in the future.

Evercore ISI analyst John Pancari thinks that regulators are "still taking their shots" at Wells following its widespread fake account scandal. Back in September, regulators fined Wells Fargo Bank NA for secretly opening unauthorized deposit and credit card accounts. Pancari thinks that the bank will remain in the regulatory crosshairs as the scandal unfolds, but does not think that the living will rejection is a material issue for the company. He does not expect the sanctions to adversely affect Wells Fargo's business model.

FBR & Co. analyst Paul Miller Jr. agreed that this decision might offer insight into future regulatory decisions concerning the bank, including the Comprehensive Capital Analysis and Review submission in 2017. He, too, said the sanctions will not materially impact revenue or profitability at Wells.

Keefe Bruyette & Woods analyst Brian Kleinhanzl also thinks that the sanctions will not be overly burdensome for the bank, as Wells is not as exposed to international markets as other universal banks. He believes that the sanctions would have been more concerning if the company's deal with General Electric was still pending, but that acquisition closed in October.

And at Sandler O'Neill & Partners LP, analyst Scott Siefers does not expect Wells to be active in any meaningful nonbank deals while it is in the process of resolving existing issues concerning the phony accounts scandal, so he does not think that the sanctions will have a material impact. However, he noted that such sanctions are "a bit of [uncharted] territory" based on the lack of similar limitations on other companies.

"The longer WFC goes without having resolved this matter, the more serious the restrictions can become," Siefers wrote in his research note.

Siefers called the deficiencies "another unfortunate surprise," but said that investors have become "somewhat attuned" to the negative headlines and will likely take the news "in stride."

Market prices are current as of the time of publication and are subject to change.