Wells Fargo expects growth limits imposed by the Federal Reserve after widespread customer abuse claims to last until next year as the lender incorporates the central bank’s recommendations into Chief Executive Officer Tim Sloan’s reforms.
The San Francisco-based lender had a “constructive dialogue” with its top regulator on plans to address the government’s operational and oversight concerns – which were required under the Fed’s sanctions – and received “some very detailed feedback,” the CEO told investors in a meeting late last week.
“In order to have enough time to incorporate this feedback in our plans in a very thoughtful manner and to make sure that we get the work done right, we’re making plans to operate under the asset cap for the first part of 2019,” Sloan said, declining to provide further details on what he characterized as a confidential supervisory process.
Wells Fargo is working hard to regain the trust of its customers, regulators and owners, the CEO assured investors, and it’s making progress. “Our fundamental business model is still intact,” he said.
That’s an assessment shared by the company’s largest shareholder, Warren Buffett, who praised the Sloan’s efforts to address issues from the creation of millions of unauthorized customer accounts to claims that Wells Fargo sold auto borrowers insurance they didn’t need and charged mortgage borrowers for expenses the bank was supposed to cover.
Sloan has said repeatedly that the bank can continue to grow profit within the constraints established by the Federal Reserve, which earlier this year capped its size at the $2 trillion in assets held at the end of 2017. At that time, it was the nation’s third-largest bank, behind New York-based JPMorgan Chase and Charlotte, N.C.-based Bank of America.
While the bank had already made significant changes since a settlement over the fake accounts – overhauling the pay structure in its large community banking division, splitting the roles of chair and chief executive officer, and cutting incentive pay for the former CEO – the Fed determined that it hadn’t yet gone far enough.
“We cannot tolerate pervasive and persistent misconduct at any bank, and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again,” former Fed Chairwoman Janet Yellen said in a statement when the limit was imposed in February.
Each of the current directors was required to sign the order, the Fed said, and received a letter stating that the board had not meet the regulator’s expectations. Yellen’s successor, Jerome Powell, subsequently agreed not to lift the restrictions without a vote by the central bank’s board of governors – a step urged by Sen. Elizabeth Warren, a Massachusetts Democrat.
“The Fed must strictly enforce its order to show Wells Fargo that it means business,” Warren said afterward.
Wells Fargo’s expectation that the size restrictions will remain in place until 2019 jibes with the forecast of UBS analyst Saul Martinez, who cited questions about the bank’s relations with regulators and its revenue outlook.
Approval by the board of governors, which oversees the Fed’s regulatory operations, is a higher hurdle for Wells Fargo than the original plan for the San Francisco branch to decide, in concert with supervision chief Randy Quarles, when the cap could be lifted, said Jaret Seiberg, an analyst with Cowen Washington Research Group.
“Rescinding the asset cap was always going to be politically difficult, given the distrust on the far left and the far right when it comes to the megabanks,” Seiberg said. “Powell’s move only further ratchets up the politics. There will be nothing routine about the vote, and we believe this will come up often during congressional hearings.”
What Wells Fargo needs to do hasn’t changed, he pointed out, but the number of officials who have to be convinced that the bank has finished its work is now larger.
“All of that adds time to the process,” Seiberg said. “It is why we believe the cap could easily remain in place into the second half of 2019. And if there are more problems at Wells Fargo, the cap could remain for even longer.”
