Wells Fargo Off The Hook As Regulators Find No Major Issues With Bank Resolution Plans

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Earlier this week, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) cleared the resolution plan for each of the eight largest U.S. banks – making this the first time since the annual process was introduced as a part of the Dodd-Frank Act in 2012 that none of the plans had any major deficiency. While the resolution plans (commonly known as “living wills”) for BNY Mellon, Citigroup, JPMorgan Chase, and State Street had no shortcomings, the regulators identified minor shortcomings in the plans for Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo. However, the latter four do not need to resubmit their resolution plans for this year, and are expected to resolve the issues as a part of their next regular submission that is due in July 2019.

The fact that the systemically important U.S. banks cleared this regulatory hurdle without any major hiccups highlights the progress made by the country’s financial system in strengthening itself since the economic downturn. The news likely comes as a relief to Wells Fargo in particular, as the banking giant was singled out last year as the only major U.S. bank yet to come up with a satisfactory resolution plan. The bank has been struggling to work its way through a string of sales scandals since last September, but with regulators green-lighting its living will, Wells Fargo now at least has one less thing to worry about.

We maintain a $56 price estimate for Wells Fargo’s stock, which is about 10% below the current market price.

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See our complete analysis of Wells Fargo here

As a part of the laws implemented under the Dodd-Frank act in the wake of the economic downturn of 2008, all major U.S. banks are required to submit detailed resolution plans to U.S. financial regulators which detail the steps that will be taken by the bank to liquidate itself efficiently in the event of a bank failure. While all bank holding companies with more than $50 billion in assets have to submit these plans, the eight largest U.S. banks are tracked in this regard more closely due to their importance in the larger U.S. banking system. Although the slew of changes proposed by the U.S. Treasury earlier this year to reduce regulatory burden on U.S. financial institutions diluted some of the rules governing the resolution plan (requiring these plans to be submitted every other year instead of each year), regulators can still impose restrictions on the banks whose resolution plans are deficient. Most notably, the regulators can restrict such banks from establishing any foreign subsidiaries and from acquiring non-bank firms

Wells Fargo attracted these restrictions last year, because of which the bank had to delay its international expansion plans. Since 2012, Wells Fargo has been eyeing a larger presence in 20 countries including the U.K., Germany, the Netherlands, France, China, Hong Kong, Australia, Japan, India, South Korea and Singapore. Besides setting up offices in foreign locations, the bank has also made several strategic acquisitions overseas. This helped its commercial lending business outside the U.S. grow steadily over the years. In fact, Wells Fargo’s foreign loans now make up more than 15% of its total portfolio of commercial and industrial loans.

No longer tied down by regulatory restrictions (at least to a degree), Wells Fargo could see more progress in this high-growth (and high-revenue) avenue over coming years. You can see how faster-than-expected growth in these loans affects our estimate for Wells Fargo’s shares by modifying the chart below.

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