Investors stop panicking and learn to live with cap

Six months after the Federal Reserve put Wells Fargo on a strict diet — no more growth until it cleans up its act — shareholders are finding it’s not so bad.

In May, the firm predicted the hit to profit will be smaller than it initially expected. In June, it announced a large jump in dividends and stock buybacks to whittle its idle cash. And even after announcing a drop in lending last month that initially spooked investors, it said the move had more to do with managing risks — then watched its shares advance.

Last week marked the halfyear anniversary of the Fed’s unprecedented sanction of a big U.S. bank, and if this were a medical checkup, the doctor would acknowledge it’s doing better than initially feared. Since Wells Fargo’s stock bottomed out in mid-April amid worries about the cap, it has gained 17 percent, the secondbest performance in the KBW Bank Index of 24 major U.S. lenders. Again and again, executives insist they can handle the restriction.

“The asset cap related to the Federal Reserve’s consent order has not impacted our ability to grow our core lending and deposit-taking businesses,” Chief Financial Officer John Shrewsberry told analysts last month on a conference call.

Perversely, one reason the cap isn’t so terrible, according to analysts, is that the bank’s businesses are being weighed down by another problem: A tarnished reputation.

Regulators barred Wells Fargo from growing total assets beyond their level at the end of 2017 because of a pattern of consumer abuses and other lapses — a list that grew Friday when the firm said it may have improperly foreclosed on 400 home loans. The order, Janet Yellen’s final act as the Fed’s chair, will remain in place until executives shore up internal controls to authorities’ satisfaction. Even without the cap, customers are unsettled.

Both existing and potential clients may shy away from Wells Fargo’s commercial unit after it charged some companies higher fees than promised on foreign-exchange transactions.

“FX trading was their big capital markets product,” Charles Peabody, an analyst at Portales Partners, said in an interview. “They’re clearly going to start to suffer on the investment banking and capital management front because corporate treasurers are going to be wary of doing business with them.”

Other businesses are contending with similar fallout from scandals.

Kyle Sanders, an analyst at Edward Jones, said in an interview: “They’re not having a lot of loans come through the pipeline, so they’re not really pushing up against this cap.”