Wells Fargo & Co. (WFC) - Get Report shares fell after CEO Tim Sloan said Tuesday that the Federal Reserve sanctions that have weighed on the scandal-plagued bank will last through the rest of this year, dashing investor hopes that the measures might be lifted by June.
The bank, the fourth largest in the U.S., has been lumbering under the regulatory sanctions since February 2018, after a slew of allegations of customer abuses that have already cost shareholders $4.5 billion in penalties, refunds and extra legal costs to resolve disputes. Under the sanctions, Wells Fargo is banned from any growth in its assets -- such as its book of loans and investment securities -- beyond $2 trillion.
To satisfy the order, executives have had to shake up their board of directors while improving risk management. In the meantime, though, they've had to turn away some customer business and unwind certain trading positions; total assets fell to $1.9 trillion at the end of last year from $1.95 trillion at the end of 2017.
Kyle Sanders, an analyst at the brokerage firm Edward Jones in St. Louis, estimated that the so-called asset cap limits Wells Fargo's revenue by about 2% per year, so a six-month extension could imply roughly 1% of forgone annual revenue.
Wells Fargo shares fell 1.6% to $47.67 at the close of New York trading, even as most other banks' shares were up.
Sloan announced the likely extension of the Fed sanctions on a conference call with Wall Street analysts, after the bank earlier in the day reported a 1% decline in fourth-quarter profit. Previously, executives had signaled that the asset cap could be lifted during the first half of this year.
"It's just taking a little bit longer than what we had originally anticipated," Sloan said, according to a transcript.
The fourth-quarter's results included $432 million of operating losses, including a $175 million cost related to an agreement reached with states and Washington, D.C., over allegedly improper retail-sales practices as well matters related to auto lending and mortgages, the bank said.
Wells Fargo still managed to produced earnings per share of $1.21, a result that exceeded the average analyst estimate of $1.19 in a FactSet survey.
"I don't think anyone was too focused on this quarter's results," Sanders said. "Everyone was looking forward."
Yet the extension of the sanctions leaves a cloud over the stock.
Chief Financial Officer John Shrewsberry noted that the bank managed during the quarter to increase individual checking customers, consumer credit-card active accounts, debt and credit-card usage and commercial loan balances, as well as the volume of new auto, small business, home equity and student loans.
Sanders said he thinks Wells Fargo still has enough headroom below the $2 trillion asset cap to continue to serve customers freely in core lending operations such as commercial loans, mortgages and credit cards.
"This could present a near-term hurdle for some investors," Sanders wrote in a report.