Wells Fargo may be stuck in the Fed’s penalty box until 2019
Wells Fargo probably won’t get out of the Federal Reserve’s penalty box any time soon.
The Fed slammed Wells Fargo in February with unprecedented sanctions that prevent the bank from growing because of its “widespread consumer abuses.” Those restrictions were to be lifted as soon as the end of September — if Wells Fargo could prove to the Fed that it had cleaned up its act.
But Wells Fargo signaled on Thursday that it has more work to do to satisfy regulators following a wave of scandals.
CEO Tim Sloan told analysts that Wells Fargo is planning to operate under the Fed’s growth restrictions “through the first part of 2019.” The growth cap limits Wells Fargo to $2 trillion in assets, the amount it held in 2017.
Last month, Wells Fargo submitted plans to the Fed aimed at showing that the bank had fixed glaring gaps in its risk management that allowed scandals to fester for years.
Sloan suggested the Fed has not approved those plans, as it must before Wells is allowed to grow again.
Wells Fargo received “detailed feedback” from the Fed on its plans following a “very constructive dialogue,” Sloan said.
The Wells Fargo boss said the bank needs time to “incorporate this feedback into our plans in a thoughtful manner, and to get the work done right.”
The asset cap will remain in effect on Wells Fargo until the Fed approves the plans, the bank makes the changes and a third party verifies it all. The Fed said in February that the review is required to be conducted by the end of September.
Sloan said talks with the Fed were confidential.
Wells Fargo’s unrealistic sales goals led workers to create millions of fake accounts, and the bank has admitted to charging customers for auto insurance they didn’t need and mortgage fees they didn’t deserve.
The Fed’s penalties are especially tough because they limit Wells Fargo’s ability to grow its balance sheet — the major lever that banks use to boost profit. Wells Fargo’s stock price has trailed rivals like JPMorgan Chase and Bank of America, each of which recently reported record earnings.
However, Wells Fargo signaled on Thursday that it’s holding up just fine. The bank told analysts the growth cap caused only a “nominal” hit to profit in the first quarter. Wells Fargo expects profits to be hurt by “less than $100 million” for 2018 because loan and deposit growth has been below expectations anyway.
Wells Fargo said the financial hit from the Fed has been “less than initially anticipated.”
In fact, Wells Fargo is performing well enough to return extra cash to shareholders. The bank said on Tuesday that over the next two to three years it hopes to exceed its target for stock buybacks and dividends.
Wells Fargo said regulators, who must sign off on buyback and dividend plans, are likely to be “more focused on capital levels than payout ratios.”
Still, the bank remains under intense legal scrutiny. Wells Fargo is under investigation by the Justice Department, the Labor Department and the Securities and Exchange Commission. Federal regulators recently urged Wells Fargo’s board to probe whether the bank made inappropriate recommendations to customers about their 401(k) plans.
Last week, Wells Fargo agreed to pay $480 million to settle claims it misled shareholders about the fake-accounts scandal.