Wells Fargo inches closer to asset cap liftoff with $3.7B CFPB settlement

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For the most part, Wall Street analysts consider Wells Fargo's (NYSE:WFC) $3.7B settlement with the Consumer Financial Protection Bureau to be a sign of progress in addressing the legacy regulatory issues it's been struggling with for years.

While the resolution of three CFPB consent orders, out of the bank's nine total outstanding orders, "would serve as a directionally positive step for Wells Fargo (WFC)," they're not directly related to the Federal Reserve's $1.95T asset cap placed on the bank, BTIG analyst Isaac Boltansky said in a note to clients.

"Progress needs to be made on the consent orders before the Federal Reserve could move to lift the cap, and any resolution on the CFPB orders would push Wells Fargo closer to this goal," the analyst said.

The CFPB settlement is "another part of the process to move past prior issues, as the current management team materially improves risk management and procedures throughout the bank," said KBW analyst David Konrad.

The settlement amount was larger than Konrad expected. And while the charge is considered a non-operating expense (therefore not included in his EPS estimate), the size of the charge is expected to reduce WFC's stock buybacks, he said. As a result he reduced his 2022 EPS estimate by $0.02 to $4.36, 2023 EPS estimate by $0.08 and 2024 EPS by $0.10.

The settlement made on Tuesday terminated a 2016 CFPB consent order relating to the bank's student loan servicing and provides "clarity and a path forward" for terminating a 2018 consent order, Wells Fargo (WFC) said.

"Once the asset cap is lifted, which could conceivably occur as early as next year, the investments made in the bank’s compliance and governance structures should prove to be a tailwind," BTIG's Boltansky said.

Besides the 2018 CFPB order, other consent orders that still remain include:

• Feb. 2, 2018 Federal Reserve Board consent order regarding governance oversight and operational risk management. Under this order, Wells Fargo (WFC) isn't allowed to grow its assets to more than $1.95T. That will stay in place until the Fed is satisfied with the bank's reform plan.
• Sept. 9, 2021 Office of Comptroller of the Currency consent order regarding Home Lending business's loss mitigation activities.

Since 2020, Wells Fargo (WFC) has made progress in terminating other orders, including:

• The December 2021 termination of the OCC consent orders issued in June 2015 regarding add-on products that the bank sold to retail banking customers before 2015;
• A September 2021 expiration of a CFPB order issued in 2016 regarding the bank's retail sales practices;
• The January 2021 termination of the OCC's 2015 consent order regarding the bank's Bank Secrecy Act/Anti-Money Laundering compliance program; and
• The January 2020 expiration of a CFPB consent order issued in January 2015 regarding claims the bank violated the Real Estate Settlement Procedures Act.

On Tuesday, Jefferies analyst Ken Usdin called the settlement a positive sign in making progress to getting its $1.95T asset cap removed.