Embattled Wells Fargo likely to operate under Fed-imposed growth cap into next year, CEO says

Wells Fargo & Co.’s stiff penalty from the Federal Reserve over its unauthorized accounts scandal and other consumer abuses will continue into next year, the bank’s chief executive told investors Thursday.

The Federal Reserve in February ordered the bank to stop growing its assets beyond $1.95 trillion — where they stood at the end of last year — until the San Francisco banking giant can show that it has improved its risk management operations and will not endanger customers.

The sanction was levied in response to a bevy of consumer abuses that have come to light over the past year and a half, including the bank’s creation of perhaps millions of bank, credit card and other accounts without customer approval, and its practice of forcing some auto-loan customers to pay for unnecessary insurance policies.

The bank earlier had suggested that the Fed could lift the asset cap later this year, potentially after a September 2018 review. But Chief Executive Timothy Sloan told investors gathered for a day-long presentation in Charlotte, N.C., that the cap will probably remain in place into early 2019.

Last month, the bank submitted compliance plans to the Fed for review. Sloan said the agency responded with feedback on those plans. “To have enough time to incorporate that feedback,” he said, “we’re making plans to operate under the asset cap through the first part of 2019.”

Sloan said he could not comment further on the matter because it involves confidential supervisory information.

Ken Leon, an equity analyst at research firm CFRA, said the longer the cap remains in place, the tougher it will be for Wells Fargo to manage it.

“They thought they’d be done by the end of the year,” he said. “There is a disappointment that this will go into 2019, and we don’t know for how long.”

Sloan and other executives have said that the asset cap will not affect most of the bank’s day-to-day operations or prevent it from making loans. Rather, they’ve said it would mean readjusting the bank’s balance sheet.

Now that the asset cap is expected to last into next year, Leon said he expects the bank may have to make more changes, perhaps shrinking some businesses where it is not a major player — stock trading, for instance — so it can continue to compete in its core business areas, such as consumer and business banking.

“I think they’re going to really press hard where they’re not a top-three or top-five player,” Leon said.

The bank also revised its estimate for how much the asset cap would ultimately cost the bank in lost profit, saying that, despite the cap’s likely longer length, the financial hit will be smaller than first expected.

In February, executives projected 2018 profit to be as much as $400 million short of where it might otherwise have been. On Thursday, Wells Fargo Treasurer Neal Blinde told investors he expects the hit will be more like $100 million.

The difference, he said, is that the bank’s loan and deposit growth has been slower than earlier estimates. Since those initial estimates were made, the bank has faced a new round of bad headlines, in particular a $1-billion penalty handed down by federal regulators last month over the same consumer abuses underlying the Fed’s enforcement action.

Leon of CFRA said the bank’s continued reputation problems could be behind the slower loan and deposit growth at the bank. Blinde said that slower growth, paradoxically, has made the Fed’s asset cap less costly in terms of lost profits.

In addition to the $1-billion penalty from the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau, the bank last week reached a $480-million settlement with shareholders who said they were shortchanged when the bank’s stock plunged after the accounts scandal mushroomed in September 2016.

Wells Fargo this week launched a new advertising campaign aimed at repairing its image and highlighting steps it has taken to repay customers and change its practices.

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