Wells Fargo escapes Fed’s asset cap after seven years, able to pursue growth

By Pete Schroeder, Nupur Anand

WASHINGTON (Reuters) -Wells Fargo was released from a punitive, seven-year-long $1.95 trillion cap on its assets on Tuesday after the U.S. Federal Reserve lifted the regulatory measure, allowing the bank to pursue unimpeded growth.

The move handed a major victory to CEO Charlie Scharf, who has been cleaning up the bank since taking the top job in 2019, and sent the bank’s shares up 2.7% in after-hours trading as investors anticipated that the bank can now expand. Wells has said it wants to grow in areas such as credit cards, wealth management and commercial banking.

“It will be a significant bump for the stock in the near term and also paves the way for long-term growth as they don’t have to manage their business around the asset cap now,” said Brian Mulberry, client portfolio manager at Zacks Investment Management, which holds Wells Fargo stock.

The Fed imposed the unprecedented restriction in 2018 following years of high-profile missteps at the bank, including a far-ranging scandal in which employees opened millions of unauthorized accounts for customers.

But the Fed said in a statement that the bank had made “substantial progress” in addressing its deficiencies, including improving its governance and risk-management programs, and completing a third-party review of its overhaul.

The Fed board voted unanimously to lift the restriction, which was the first time the central bank had directly ordered a bank to stop growing in order to address widespread shortcomings.

“This marks the end of a painful period for Wells Fargo, and also serves as a reminder for financial institutions to be sure customer interests are always aligned with growth goals,” said Stephen Biggar, banking analyst at Argus Research in New York.

The decision is a major step in the bank’s longstanding efforts to repair the damage from scandals that erupted in 2016, drawing public criticism and billions of dollars in fines.

Scharf called the move a “pivotal milestone.”

“We are a different and far stronger company today because of the work we’ve done,” he said in a statement, adding that all full-time bank employees will receive a $2,000 award to commemorate the accomplishment.

JPMorgan Chase Chief Executive Officer Jamie Dimon praised Scharf, once his protege and a former executive at the bank. “Charlie and his team deserve a lot of credit – having worked extremely hard to resolve the company’s heritage issues,” he said.

MAJOR SHIFT

While the bank still faces some additional oversight from the Fed as part of the 2018 order, the removal of the asset cap marks a major shift for the nation’s fourth-largest lender, after the scandals ousted multiple executives as regulators piled fines and restrictions on the bank for its wrongdoing.