Investors pushed shares of Wells Fargo & Co. down more than 8% in early trading Feb. 5 as Wall Street absorbed news of Federal Reserve sanctions against the banking giant that could cut its 2018 profits by as much as $400 million.
Pointing to "widespread consumer abuses" and "compliance breakdowns," Fed officials said after markets closed Feb. 2 that they had issued an unprecedented consent order against Wells. In addition to heightened scrutiny on risk management and a concurrent decision by Wells to replace four board members, regulators barred Wells from growing beyond the $1.952 trillion in assets that it had on its balance sheet at the close of 2017. It marked the first time the Fed limited an entire banking company's asset size.
The restrictions are likely to hinder revenue growth and profitability. Wells executives said that, while they intend to continue growing core loans and deposits, they likely will have to reduce other portfolios to manage the bank's total size. That could shave some $300 million to $400 million off of 2018 net income, they said.
Analysts said the Fed move also amounts to another hit to Wells' already tarnished reputation and could make it difficult for Wells to keep some clients or attract new customers. That would hurt its ability to grow core lending and take advantage of rising interest rates to lift net interest income levels.
The cap on expansion is "particularly damaging," as investors "have been looking for banks to take advantage of a better growth environment to drive their NII higher through better loan growth," Compass Point Research & Trading analyst Charles Peabody said in a report. He said the Fed action puts Wells "at a competitive disadvantage" and "other banking firms are likely to try to take up the capacity that Wells may not be able to deliver to its current customer base."
Wells' stock sunk more than 8% in early morning trading Feb. 5, the first regular session following the Fed announcement. Its shares remained deep in the red at 10:30 a.m. ET, down about 6.9% to $59.65.
"Negative thoughts, that's what we are hearing this morning," Mike Matousek, a trader at U.S. Global Investors Inc., said in an interview. Wells "will probably survive, but it seems very likely that this whole thing is going to drag on for years, and investors are nervous about how long it will take the bank to get out from under all of this."
Vining Sparks analyst Marty Mosby said in an interview that it could take Wells 18 to 24 months to satisfy regulators' demands and get the consent order lifted. That essentially makes 2018 — and perhaps 2019 — another year devoted to turnaround efforts, he said.
"This will linger," Mosby said.
The Fed action marks the latest chapter in a perilous era for Wells, one that dates to September 2016. That is when regulators fined the San Francisco-based bank after learning that employees opened about 2 million sham accounts in existing customers' names to meet lofty sales goals. Internal examinations have since found more than a million additional phony accounts as well as invalid charges to certain auto loan and mortgage customers, among other problems.
