Wells Fargo (NYSE:WFC) found itself in an unusual position over the past few months, going from golden child of the bank industry to its fallen angel thanks to a scandal and a series of regulatory missteps. But the tide has already begun to turn for the nation's third largest bank by assets, thanks in no small part to the new presidential administration.
The regulatory rollback has begun
Earlier this week, the U.S. Labor Department removed a website it had created to log complaints from Wells Fargo employees who claimed to have been retaliated against by supervisors for blowing the whistle on a massive fake-account scandal that look place at the bank from at least 2011 through 2015. Click on the link today, and it reads "Page not found."
The removal was noted by Democratic Senator Elizabeth Warren in a letter to acting Labor Secretary Edward Hugler. "Taking down this website enables Wells Fargo to escape full responsibility for its fraudulent actions and the department to shirk its outstanding obligations to American workers," she wrote.
This move is consistent with other ones that the Trump administration has taken to begin rolling back regulations in the financial services industry and others. But it comes at an especially important time for Wells Fargo.
A series of unfortunate events
The California-based bank has had a number of run-ins with regulators over the past five months. It all started in September, when the Consumer Financial Protection Bureau revealed that thousands of Wells Fargo employees had opened millions of accounts for customers, without customer approval to do so, in order to meet aggressive sales quotas. Wells Fargo was fined $185 million for the malfeasance and was ordered to conduct a review of its sales practices.
At first glance, it appeared as if Wells Fargo would suffer only minimal damage from the scandal. While the fine was big, it nevertheless amounted to less than 4% of Wells Fargo's quarterly earnings. On top of that, there was little reason for the bank to be concerned that its customers would abandon it, given how inconvenient it is to change banks.
But any thought that Wells Fargo could simply close the book on the scandal was shot down when its chairman and CEO at the time, John Stumpf, was publicly harangued by members of congress in hearings later that month. His belated response to the crisis combined with a disappointing performance in front of Congress led to his resignation two weeks later.
Things continued to deteriorate from there. In November, the Office of the Comptroller of the Currency began requiring Wells Fargo to seek regulatory approval for changes to its executive officers or board of directors. And then in December, after failing a critical regulatory test, the Federal Reserve limited its ability to make acquisitions or expand internationally.
The good news was that the scandal didn't have a debilitating impact on Wells Fargo's fourth-quarter earnings. It translated into higher costs and has certainly caused considerable damage to its reputation, but the bank still emerged from the three-month stretch with $4.9 billion worth of earnings, down from $5.2 billion in the year-ago period.
The bad news, however, is that it will almost certainly result in lower long-term growth, a point its new CEO Tim Sloan has acknowledged. You can get a sense for this from the 40% year-over-year decline in checking account openings at the bank in December, as well as the 43% drop in credit card applications. Both figures fell after Wells Fargo eliminated sales quotas in its bank branches in the wake of the scandal.
Suffice it to say, then, Wells Fargo is undoubtedly ecstatic with the latest turn of events. Beyond the Labor Department's decision to take down the whistleblower website, the Trump administration has promised to dramatically deregulate the bank industry and defang the very same regulatory bodies that have made life so difficult for Wells Fargo over the past few months.