Wells Fargo is positioned to return more money to investors through dividends and stock buybacks than most of its biggest competitors, provided three years of headline-making scandals don’t get in the way.
While the San Francisco-based firm is one of 18 lenders that the Federal Reserve found were capitalized well enough to withstand a major economic downturn in the first phase of this year’s stress tests, the central bank has yet to say whether it would remain that strong after payouts over the next 12 months that may amount to billions of dollars.
The stress tests, begun in 2010 as the U.S. worked to prevent a repeat of the 2008 financial that spurred massive taxpayer bailouts, give the Fed the authority to block payments from lenders that don’t meet standards for minimum capital levels and internal oversight during the final phase of the stress tests, whose results are due this week.
That could prove an obstacle for Wells, which has paid billions of dollars in fines after complaints that its workers created millions of phony customer accounts, sold some auto-loan customers insurance they didn’t need, and overcharged mortgage borrowers, analysts say.
“Other federal regulatory agencies, such as the Office of the Comptroller of the Currency, have called into question Wells Fargo’s internal control processes, particularly senior management’s oversight of compliance and regulation,” said Kenneth Leon, an analyst with CFRA Research. Whether those deficiencies spill over to the controls of capital-planning processes is “a reasonable risk,” he said.
Still, Wells Fargo won approval of its payout plan in 2018, even after the Fed capped its assets at the amount held at the end of 2017, a move that prohibited overall growth until the bank resolves the regulator’s oversight concerns.
The third-largest lender in the U.S., Wells Fargo’s fortunes have seen a dramatic decline since it reaped kudos in the aftermath of the financial crisis for sufficient strength that it didn’t require a bailout, unlike rivals Citigroup and Bank of America.
The spiral dates to at least 2016, when Wells Fargo paid $185 million to settle claims that employees, struggling to meet aggressive targets that included selling as many as eight different products per household, had created millions of unauthorized customer accounts.
The revelations and the fiery congressional hearings afterward spurred the departure of then-CEO John Stumpf, and criticism over subsequent issues prompted his successor, Tim Sloan, to step down in March. C. Allen Parker, the bank’s general counsel, replaced Sloan on an interim basis while the board searches for a permanent CEO.
“We don’t believe that there is anything about where we are today in terms of the regulatory processes, whether it’s the asset cap or anything else, that’s going to change the way” the Fed reviews Wells Fargo’s payout under the comprehensive capital analysis and review, or CCAR, as the stress tests are formally known, Parker said at a New York conference in late May. “We’re going to see a similar return of capital, what we’ve had in the past, if we get the right kind of response on CCAR.”
Last summer, the Fed approved a payout of $32.5 billion from July 1, 2018, through the end of June, and JPMorgan analyst Vivek Juneja projects the amount may climb 3% to $33.6 billion over the next 12 months. That would represent about 16% of Wells Fargo’s market value, making the payout the highest of the banks Juneja tracks.
JPMorgan has an underweight rating on Wells stock, the equivalent of a “sell,” based on “uncertainty and political risk from several ongoing investigations into its various scandals.”
Not least among them is the 2020 presidential campaign. Sen. Elizabeth Warren, the Massachusetts Democrat seeking her party’s nomination to run against President Trump, has been a harsh critic of the bank and repeatedly called for Sloan’s dismissal.
Meanwhile, the currency comptroller, one of the bank’s main regulators, said in March it was disappointed with Wells Fargo’s “inability to execute effective corporate governance and a successful risk management program.”
In December, Wells Fargo agreed to pay $575 million to resolve claims with prosecutors in all 50 states and Washington, D.C., related to both the phony accounts and issues in its auto- and mortgage-lending businesses.
Before that, the bank shelled out $1 billion to settle government claims it sold some auto borrowers insurance they didn’t need under the pretense they might not qualify for their loans otherwise and charged fees to mortgage customers that it was supposed to be absorbing.
In August, the bank said it would pay $2.09 billion to settle Justice Department allegations that the bank packaged mortgages that were higher risk than they appeared into securities sold before the financial crisis.
