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Technology > Investment Platforms > Turnkey Asset Management

Wells Fargo Facing 'Uphill Fight' Over Fed’s Growth Cap

By Hannah Levitt

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Charles ScharfWells Fargo CEO Charles W. Scharf (Photo: Bloomberg)

As Wells Fargo & Co.’s stock starts to attract the love of analysts and investors again, some are speculating the Federal Reserve may soon lift a cap on the bank’s growth.

The regulator and the company itself aren’t nearly as optimistic.

Some top executives at the San Francisco-based lender privately expect the bank not to exit the limit on assets until late next year at the earliest, while key Fed officials see the process dragging into 2022 or beyond, according to people familiar with their thinking.

The protracted outlooks are largely based on the number of steps remaining for the company to clear, the people said.

Since the cap was imposed in early 2018, investors have tried to figure out how long the sanction might last. It has already forced Wells Fargo to miss billions of dollars in profits.

To get it lifted, executives must show progress in bolstering internal systems, persuade Fed officials to approve a plan for finishing the overhaul, and then undergo a third-party review.

A spokesperson for the Fed declined to comment. The bank has no official estimate for satisfying the regulator.

“The Federal Reserve will determine when the work to fulfill the requirements of the consent order is done to their satisfaction,” Wells Fargo said in a statement.

“We are focused on doing the work. We maintain strong levels of liquidity and capital, and we are committed to using our financial strength to help support the U.S. economy and our clients while operating in compliance with the asset cap,” it added.

Yet optimism has been mounting in recent weeks outside the company. Wells Fargo’s stock has gained 37% since touching an 11-year low in late October.

Wells Fargo stock chart from Bloomberg for 2020

In a note to clients last month, Deutsche Bank AG analyst Matt O’Connor suggested the Fed could remove the asset cap within six months. Following a spate of upgrades, more analysts now recommend buying the bank’s shares than at any point under the year-old tenure of Chief Executive Officer Charlie Scharf.

Scharf has repeatedly demurred in offering shareholders any forecast on how long it might take to exit the cap. He and his management team, trying not to raise expectations or antagonize the regulator, have adopted a cautious tone, emphasizing that much work remains to be done.

“We have to do the work,” Scharf said Tuesday at an industry conference. “I can’t speak for the regulators. They’ll be the ones to determine when the work is done to their satisfaction, but again I can say it’s our priority.”

At the outset of the cap, neither the bank nor Fed expected the process would take as long as it has, people familiar with the situation have said.

In September, Wells Fargo submitted a new proposal for completing its overhaul after the Fed rejected an earlier version drafted under Scharf’s predecessor.

The Fed has yet to approve the new plan, the people said. If that happens, the third-party review could take months longer. Finally, the full Fed board would have to agree to lift the cap.

More-cautious observers have even broached the possibility that President-elect Joe Biden’s administration could name watchdogs or new Fed governors who prolong the process.

“We expect Wells Fargo to push the Federal Reserve to release it from the asset cap before Biden can replace top Fed officials in late 2021 and early 2022,” Cowen analyst Jaret Seiberg wrote in a note in October.

But “we see that as an uphill fight, which is why the asset cap could stay in place into 2023,” he said.

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