Wells Fargo's CFPB settlement marks 'positive progress', Jefferies says

JasonDoiy

Wells Fargo's (NYSE:WFC) $3.7B settlement with the Consumer Financial Protection Bureau represents a "sign of positive progress" on moving toward the goal getting its asset cap removed, Jefferies analyst Ken Usdin wrote in a note to clients on Tuesday.

The settlement covers several open investigations with the CFPB, he notes. "We see the formal completion as a positive in its finality."

However, the bank isn't past its regulatory troubles. "WFC has several other outstanding legal items (detailed in the 10-Q/K) that are constantly being evaluated and re-assessed for potential reserving," Usdin wrote. (And CFPB Director Rohit Chopra, in his remarks, emphasized that the bank's regulatory troubles aren't yet in the rear-view mirror.)

Wells Fargo (WFC) stock has slipped 1.4% in Tuesday midday trading, the only one of the U.S.-based megabanks in the red. By contrast, the SPDR S&P Bank ETF (KBE) rose 0.6%.

In its statement on the settlement, WFC said it expects Q4 operating loss expense of ~$3.5B, which includes the incremental costs of the CFPB civil penalty and related customer remediation as well as amounts related to outstanding litigation matters and other customer remediation.

Usdin, who has a Buy rating on the stock noted that WFC had accrued ~$3.7B for probable and estimable losses, also called RPL, as of Q3, but that doesn't equate with the CFPB settlement amount. "Today's $3.7B settlement does not mean that the RPL will go to zero or anywhere close to it," the analyst said. "We would hope that the RPL would decline somewhat after 4Q given the magnitude of today's settlement, WFC's incremental $3.5B of 4Q op. losses, and severity of the actions."

Some of the $2B of customer remediation, that's part of the CFPB settlement, may have already been paid out and reserved for, he said.

The SA Quant system rates Wells Fargo (WFC) a Hold, while the average SA Author's rating and Wall Street rating are both Buy.

On Monday, SA contributor Labutes IR explained why he considers WFC to be a value trap