Banking

Wells Fargo faces its next big test on Wednesday

Wells Fargo learns Wednesday whether a spate of recent setbacks, including its September sales scandal, will cause it to finally stumble on a key examination by the Federal Reserve.
Wells Fargo learns Wednesday whether a spate of recent setbacks, including its September sales scandal, will cause it to finally stumble on a key examination by the Federal Reserve. Getty Images

Wells Fargo learns Wednesday whether a spate of recent setbacks, including its September sales scandal, will cause it to stumble on a key examination by the Federal Reserve.

The San Francisco-based bank has sailed through all of the Fed’s previous “stress tests” – annual reviews the regulator has conducted since 2009 to determine if the biggest financial institutions are resilient enough to survive another financial crisis. Poor performance on the closely-watched exams can be embarrassing to firms – and, more importantly, could cause the Fed to object to proposed dividend increases and share buybacks.

This year, Wells Fargo is under enhanced scrutiny following its sales scandal as well as struggles with its “living will,” a document that shows regulators how the bank could be dismantled without a taxpayer bailout in a time of distress. In December, Wells became the first firm slapped with penalties over the living will process, though the bank has since remedied the issues.

While some analysts are expecting Wells Fargo’s streak of passing the stress tests to continue this week, others are not so sure.

“I think it will be very difficult for the Fed to announce Wells just fine in light of the stuff that’s still coming out,” said independent bank analyst Nancy Bush.

While Wells had a “quite strong” performance last week in the tests’ first phase, which measured firms’ capital levels, the Fed could still flag Wells’ risk- and operational-management systems, Bush said.

“It is entirely possible,” she said.

Last week’s test found that Wells would have an 8.6 percent ratio of common equity tier 1 capital to risk-weighted assets in a severe downturn, higher than the required 4.5 percent minimum.

A spokesman for Wells Fargo, which has a large presence in Charlotte, declined to comment.

Wednesday’s test results are critical for all 34 bank holding companies involved, including Charlotte-based Bank of America. But they’re even more important for Wells because the third-biggest bank by assets is seeking to repair its image after authorities said its employees opened more than 2 million accounts that may not have been authorized by consumers as they pushed to meet aggressive sales goals.

Wells has taken steps to move past the scandal, including firing executives and overhauling its compensation program for retail bankers in branches. Despite such moves, some states and cities have ended business deals with the bank, which still faces lawsuits over the sales scandal.

In addition, Wells Fargo’s 4 percent drop in stock price this year trails the performance of its three biggest rivals. Bank of America is up about 4 percent, while New York’s JPMorgan Chase and Citigroup are up 1 percent and 7 percent, respectively.

In another setback, in March the Office of the Comptroller of the Currency, citing the scandal, downgraded Wells on a closely watched rating of community lending.

Banks typically do not publicly disclose details of the capital plans until the Fed rules on them. Still, Wells executives have fielded questions from analysts looking to gauge whether the bank’s recent setbacks will affect this year’s test, whose submission is led by Charlotte-based capital management head Jeff Colson.

Speaking last month at an industry conference in New York, Chief Financial Office John Shrewsberry did not share specifics of Wells’ proposed capital plan but said the bank “sized” its request “appropriately.”

“So it’s my expectation that that will suffice,” he said.

Banks, including Bank of America, in the past have tripped up on the “qualitative” portion of the test for which firms will receive findings Wednesday. In that portion, the Fed examines areas such as banks’ controls and governance processes. When the regulator has found issues, it has used its power to scuttle proposed capital plans.

In in a report last month, Guggenheim Securities analysts said they remain concerned Wells is at risk of failing Wednesday. Wells “has made significant efforts to remediate the inappropriate activities in its consumer banking segment,” they wrote, “but we still view it as being at risk of qualitative failure.”

In a separate report last week, analysts with Sanford C. Bernstein & Co. wrote they expect Wells to pass the qualitative test – “as we see the sales practice shortcomings as unrelated to capital planning, and expect (the bank) incorporated any related risk (management) issues into its capital plan.”

Deon Roberts: 704-358-5248, @DeonERoberts

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