S&P Downgrades Wells Fargo On “Unprecedented Regulatory Issues”

S&P Downgrades Wells Fargo On “Unprecedented Regulatory Issues”: Full Report

Wells Fargo & Co. Downgraded To ‘A-/A-2’ From ‘A/A-1’ On Prolonged Regulatory And Governance Issues; Outlook Is Stable

  • On Feb. 2, Wells Fargo & Co. (“Wells”) became subject to a consent order from the Federal Reserve that caps the company’s asset growth until it further enhances its governance and compliance and risk management to the standards required by the regulator.
  • This unprecedented asset cap on a large bank underscores the continued elevated regulatory risks for Wells, and the ongoing ramifications of its retail sales practices issues, as well as the complexities of improving compliance and operational risk controls throughout its very large organization.
  • We are lowering our ratings on Wells by one notch to ‘A-/A-2’, recognizing that the duration and severity of these regulatory, governance, and reputational issues are not commensurate with the previously peer-leading ratings on Wells.
  • Our stable outlook assumes that the company will meet the requirements of the regulatory consent order while maintaining solid market shares in its major businesses as well as a strong financial profile.

NEW YORK (S&P Global Ratings) Feb. 7, 2018–, S&P Global Ratings today lowered its long-term issuer credit rating on Wells Fargo & Co. to ‘A-‘ from ‘A’ and its short-term issuer credit rating to ‘A-2’ from ‘A-1’. At the same time, we lowered our long-term issuer credit rating on Wells Fargo Bank N.A. to ‘A+’ from ‘AA-‘ and our short-term issuer credit rating to ‘A-1’ from ‘A-1+’. The outlooks on both entities are stable.

We also lowered the group credit profile to ‘a’ from ‘a+’.

The downgrade follows news that Wells has entered into a cease-and-desist consent order with the Federal Reserve that restricts the company’s asset growth to its total asset size at the end of 2017 until it sufficiently improves its governance and controls. Following this punitive regulatory action, our downgrade reflects our view that regulatory risk for Wells is more severe than we previously expected and the process for improving its governance and operational risk policies may take longer than we previously expected. At the same time, the company may be subject to prolonged reputational issues. The company also announced that it will replace four additional members of its Board of Directors, signaling that the Board continues to be in transition.

Our stable outlook reflects our expectations that Wells will continue to build on progress it has made in strengthening its management structure and controls and meet the provisions of the Fed consent order, including a third-party confirmation of the company’s implementation of its improvement plans by Sept. 30, 2018. We also expect that its competitive positions in key businesses will not be significantly hurt by the regulatory growth restrictions and that it will maintain its good earnings generation and stable asset quality over the next two years. We expect that capital ratios will remain substantially above the company’s longer-term target CET1 ratio of 10%, and that S&P Global’s risk-adjusted capital ratio will remain at the higher end of our 7-10% range that we consider adequate.

We could lower the ratings if Wells does not meet the requirements under the Fed’s regulatory consent order, if the asset cap is not lifted in a reasonable timeframe, or if Wells’ market shares erode significantly–developments we do not currently expect. We might also take negative rating actions if the retail sales practices issue (and other operational control issues) becomes even more material to the company’s overall credit profile. This could occur if we expect substantial additional fines that are large relative to earnings, or if sizable additional operational controls, compliance, or governance weaknesses surface. We could also lower the ratings if customer flows in key businesses show pronounced negative trends for a sustained period, if nonperforming assets or credit losses rise significantly, or if capital ratios decline materially as the result of more aggressive dividend or share-buyback policies.

We could raise the rating if Wells resolves the deficiencies that the Fed identified in its risk management, governance, and compliance practices. In addition, we would expect uncertainties about further regulatory and legal actions to be meaningfully reduced.  Additionally, Wells would need to regain its peer-leading business stability, and maintain above-peers’ risk-adjusted earnings generation, combined with solid capital ratios and good asset quality.



2 Responses to “S&P Downgrades Wells Fargo On “Unprecedented Regulatory Issues””
  1. Julia Young says:

    Downgraded Wells Fargo?
    Yesterday I received a check from a Wells Fargo class action. I don’t recall adding my name to the claim. It is labeled “Wells Fargo Inspection Fee Settlement Fund.” I once had a Wells Fargo predatory loan. They charged for inspections never made,, just added it to my statement every month. Maybe the Class Action lawyers threw my hat in the ring for those bogus inspections, you think? Wow that would have been a HUGE class..
    I wanted to show you the check so you would know WF pays up when caught with hand in till even though I didn’t know what I was owed. The letter is minus those details. The instructions they make was to be sure I knew to contact my accountant to determine how much the IRS wants for taxes out of my settlement. Oh yeh, they said not to delay in cashing it! If I don’t hurry it might bounce, you think? I might even frame it!
    Oh, did i mention the sum of my settlement check? [drum roll here please]
    $1.82 No typo. Not $182.00 or even $18.20. It really is a one dollar and eighty two cent check they sent to use [or abuse] my name in their class action lawsuit. I haven’t checked the website to see how much the Wells Fargo ‘hold up’ netted these bandits [pun intended]maybe in the millions.
    Who says crime doesn’t pay off!!

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