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Wells Fargo's living will verdict a surprise


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Wells Fargo's living will verdict a surprise

Piper Jaffray analyst Kevin Barker expects Wells Fargo & Co. to ultimately tackle the deficienciesarising from the April 13 living will verdictand does not anticipate any major operational or capital headwinds from it.

In a research note, Barker noted that the deficiencies in thecompany's resolution plan were related to documentation, corporate governance, corporateoperations and legal entity rationalization, rather than the company's core operations.Barker expects some additional expenses as the company assigns additional resourcesto ensure quality control within resolution plans but does not think that it willchange his fundamental outlook on the company.

He also noted that if Wells Fargo, and the other companies thatdid not provide "credible" resolution plans under the "living will"test — JPMorgan Chase & Co.,State Street Corp., , andBank of America Corp. —fail to remediate their deficiencies and resubmit a plan by the due date of Oct.1, they might be subject to stricter prudential requirements.

Furthermore, the analyst believes that if the companies continueto fail the Federal Reserve's and the FDIC's requirements, the regulators may requirethe companies to increase capital levels, force divestitures, and/or restrict growth.

Barker rated Wells Fargo at "neutral" with a pricetarget of $47.

Sandler O'Neill & Partners LP analyst R. Scott Siefers alsopublished a note looking into Wells Fargo's living will submission. Siefers wrotein the report that the company's "regulatory shortfall is always a surprise,"but he does not expect many near-term ramifications. The analyst found it surprisingthat Wells Fargo's plan came up short because in his view, the company had moresuccess than its peers in prior submissions. He also noted that Wells Fargo is most"plain vanilla" among the banks that undergo this process and is widelyrecognized as about as strong a bank as there is, quantitatively and qualitatively.

However, the analyst does not expect today's verdict to negativelyaffect the stock price or to have any ramifications for 2016's Comprehensive CapitalAnalysis and Review. "Overall, we expect the company to address the apparentdeficiencies and to move forward from there. Even if it were unable to do so, oursense is that any potential ramifications would manifest themselves over a periodmeasured in years as opposed to months or quarters," he added. Siefers expectsto hear a bit more about the situation during the company's first-quarter earningscall.

He is currently rating the company stock at "hold,"with a price target of $51.

Keefe Bruyette & Woods Inc. analysts also released a reportprior to the living will verdicts. The analysts noted that the banks that did notpass the living will exam "would have a blueprint for passing and this shouldallow non-passing banks to improve the living will submissions." The analystsexpect higher regulatory-related expenses as banks remediate any potential flawsin their resolution plans, but they do not believe that the increase in costs willbe meaningful.

Christopher Mutascio of Keefe Bruyette & Woods reiteratedhis "outperform" recommendation for JPMorgan following its earningsrelease, with a price target of $72.

Discontinued coverage

Piper Jaffray analyst Matthew Breese discontinued his coverageof Allentown, Pa.-based National PennBancshares Inc., followingits acquisition byBB&T Corp.