It's been more than seven years since Wells Fargo's (WFC -0.28%) phony-accounts scandal came to light. Since then, the bank has dealt with a raft of fines, regulatory consent orders, litigation, and an asset cap that's prevented the bank from growing its balance sheet.
The bank has made a great deal of change as well since CEO Charlie Scharf came aboard in 2019. Scharf has created a new regulatory framework for the bank and brought in new blood to oversee the rest of the work and run the bank. He has also made Wells Fargo much simpler, divesting non-core businesses and focusing on the U.S. franchise.
But despite all of the work, the asset cap is still in place, and the bank still has many outstanding consent orders. So is Wells Fargo making progress on its ongoing regulatory work? Let's take a look.
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The good news
The bank reported good news in the first quarter when operating losses came in at $267 million, the lowest quarterly amount in two years. Operating losses cover issues such as customer remediation expenses for historical matters such as the phony-accounts scandal. They serve as one way to gauge what is going on in the present with regulatory matters, although operating losses can be lumpy and hard to predict.
For instance, Wells Fargo paid over $5.7 billion in operating losses in the back half of 2022. One of those had to do with the bank's massive $3.7 billion fine from the Consumer Financial Protection Bureau, which had to do with a number of historical matters.
Still, not only did the bank have lower operating losses in Q1, but it also repurchased $4 billion of stock in Q1 and indicated that more share repurchases are coming this year. The bank had plenty of excess capital last year but didn't repurchase stock for the majority of the year. While I can't be entirely certain, I think part of the reason for holding off had to do with the expected regulatory charges, so the repurchases this year suggest that the bank may not be expecting any massive regulatory issues like what they saw this year, at least from where management sits today.
The path forward
Despite some of the multibillion-dollar fines and work that Scharf has done, the bank still has many outstanding consent orders, and the asset cap is still in place. The asset cap remains the biggest inhibitor to the stock because balance sheet growth is a big way that banks make money. Wells Fargo has easily forfeited billions of dollars of profits as a result of the asset cap.
In this year's annual letter to shareholders, Scharf repeated a line that he has now said many times: "Our progress will likely not be a straight line." Scharf also said that the "resolution of outstanding issues such as litigation, customer remediations or regulatory investigations have and could continue to have financial impacts" and that until the work is completed, new issues that need to be addressed are likely to arise.
That has certainly been evident, as the bank got fined $97 million just last month for violating U.S. sanctions against Iran, Syria, and Sudan, although the fine was apparently tied to events that took place between 2010 and 2015. The New York Post also recently reported that Wells Fargo is set to soon meet with the U.S. Office of the Comptroller of the Currency (OCC) for "matters requiring attention" that had to do with the bank's trading business, although it's a bit hard to tell how reliable this report is.
When asked by an analyst about the recent report, Scharf said, "I would just be really careful to take the source that you're taking and using that to expand into anything beyond from whence it came. If it was anything meaningful to report, we report it."
In its annual regulatory filing at the end of 2022, Wells Fargo said its accrual for probable and estimable losses related to litigation was $1.4 billion. It will be interesting to see if that number changed in Q1 when the bank releases its quarterly regulatory filing.
Could something meaningful happen this year?
Many analysts have tried and failed to guess when the asset cap might be removed. Personally, I do not believe all of the remaining consent orders need to be terminated for Wells Fargo to get the asset cap removed. Also, some of these consent orders are connected to one another, so solving one can help move the process along more than one might think.
It's now been more than two years since there has been news regarding the asset cap when media outlets reported that the Federal Reserve reportedly approved the bank's overhaul plan for its risk-management and governance structure.
That's why I continue to believe that news on this front should be forthcoming. It may not be total asset cap removal, but I do think, given the changes the bank has made and some of the matters it has now settled, the bank has likely made significant progress on the asset cap and should be much further along in getting the asset cap removed.
