Wells Fargo, the lender tarnished by a series of claims from regulators that it exploited customers, had a 50 percent chance of passing the subjective portion of this year’s Federal Reserve’s stress tests, Morgan Stanley estimated.
The fact that it did, with central bank regulators approving a stock buyback late last week almost twice as high as expected, shows the Fed is receptive to the governance improvements Chief Executive Officer Tim Sloan is making after a consent order earlier this year limited the bank’s growth, said Morgan Stanley analyst Betsy Graseck.
“This gives us more conviction” that the San Francisco-based lender can meet the Fed’s requirements for lifting the restrictions by mid-2019 and increases the odds that it might happen even sooner, Graseck said in a note to clients on Monday.
Wells Fargo said Thursday it had received Federal Reserve permission to raise its dividend by 4 cents a share, to 43 cents a quarter, and more than double its stock buybacks over the next 12 months to as much as $24.5 billion.
“The Fed’s capital return approval for Wells significantly beat our estimates for buybacks,” Graseck wrote. “We were modeling a 40 percent increase,” and the Fed signed off on a 115 percent increase, she said. In the aftermath, Morgan Stanley boosted its rating on the stock to equal-weight, the equivalent of a hold, and raised its 12-month price target 8.8 percent to $62.
The stress tests, imposed on the largest U.S. banks, measure their ability to withstand several financial shocks after proposed capital distributions such as dividend payments and stock buybacks. The yearly reviews, which include empirical assessments of assets and liquidity as well as more esoteric “qualitative” issues, were established as the government worked to safeguard the financial system from a recurrence of the 2008 crisis, which prompted billions in bailouts.
Sloan told Wells Fargo investors in May that executives had a “constructive dialogue” with Fed regulators on plans to address the government’s operational and oversight concerns – detailed in the growth restrictions – and received “some very detailed feedback.” The Fed’s order, announced just before the departure of former Fed Chair Janet Yellen, barred Wells Fargo from increasing its total assets beyond the nearly $2 trillion it held at the end of last year.
It followed the creation of more than 3 million unauthorized customer accounts, disclosed in a 2016 settlement with the Consumer Financial Protection Bureau that led to contentious Congressional hearings and the abrupt departure of then-CEO John Stump.
Then, in early 2018, Wells Fargo agreed to pay $1 billion in civil penalties to settle investigations of its automotive- and mortgage-lending practices. The government said the lender had sold some auto borrowers insurance they didn’t need under the pretense they might not qualify for the loans otherwise, and charged fees to mortgage customers that it was supposed to be absorbing.
U.S. Rep. Maxine Waters, the highest-ranking Democrat on the House Financial Services, said the Fed’s approval of Wells Fargo’s planned payments is troubling.
“I was pleased when the Federal Reserve, under former Chair Yellen, issued a cease-and-desist order in February to cap the megabank’s size until it cleans up its act,” said the California congresswoman, who introduced a bill last year that would require regulators to use their authority to shut down banks that repeatedly harm consumers. “However, the Federal Reserve’s recent decision undermines that tough action and sends a terrible message.”
Wells Fargo shares, hammered after the fake accounts became public, have climbed 9.5 percent to $56.32 in the almost two years since — less than half the 27 percent increase on the benchmark S&P 500.
