agreeing to hold its size to roughly $2.0 trillion


Regulators Give Wells Fargo a $25 Billion Win

The bank's shareholders can look forward to a 10% dividend increase and a massive buyback plan.

Jordan Wathen Jordan Wathen (TMFValueMagnet ) Jun 29, 2018 at 12:00PM

The Federal Reserve isn't pleased with *Wells Fargo*'s (NYSE:WFC ) scandals, but it isn't opposed to the bank paying out billions of dollars to its shareholders.

Yesterday, the Fed said it had no objection to Wells Fargo's capital plan, which calls for increasing its quarterly dividends to $0.43 per share, up from $0.39, and buying back up to $24.5 billion of stock over the next four quarters.

Approval for big payouts also suggests to me that Wells Fargo is on the way out of regulatory troubles for its fake account scandals and historical sales practices, and it could soon be given the green light to grow once again.

Beefy buybacks

To be sure, a 10% increase in Wells Fargo's quarterly dividend is nothing to sneeze at, but the $24.5 billion boost to its buyback capacity is the real prize. It's the largest buyback plan of any of the big four U.S. banks.

Wells Fargo was valued at about $261 billion at market close yesterday, which suggests the company could repurchase more than 9% of its outstanding shares, assuming it bought back stock at recent market prices.

In some ways, past regulatory action laid the groundwork for Wells Fargo to get approval for a massive buyback program. In February, the San Francisco-based bank entered into a consent order agreement with the Federal Reserve, agreeing to hold its size to roughly $2.0 trillion in assets until the chief banking regulator is satisfied with its progress in improving its compliance and risk-management processes and oversight.

Banks need about $1 of equity capital for every $10 of deposits, so they must retain earnings to grow. Wells Fargo can't grow, so it's in a better position than perhaps any bank to send all of its earnings power right out the door in the form of dividends and buybacks.

Regulatory relief coming soon?

The Fed scrutinizes banks' capital plans based on quantitative and qualitative factors. For Wells Fargo, the qualitative portion was always the question mark. Given fake account scandals, billion-dollar fines , and intense regulatory scrutiny, the Fed had plenty of cover to fail the bank for qualitative reasons, assuming it wanted to.

Wells Fargo branch.

Image source: Wells Fargo.

Initially, Wells Fargo believed it could get out from underneath its $2 trillion cap on assets as soon as October 2018. At its recent investor day, CEO Tim Sloan suggested that the cap may go on longer -- perhaps into the early months of 2019.

The fact that the Federal Reserve didn't oppose Wells Fargo's capital plans suggests to me that the worst of regulatory purgatory is in the rearview mirror. From my vantage point, whether the bank gets the green light to grow in 2018, 2019, or even in 2020, isn't necessarily all that important for the investment thesis.

It's my view that Wall Street had gone too far, valuing the bank as if it would never grow again. That possibility, though remote, seems far less likely today than it did even a few short days ago.

/Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy ./

Author

Jordan Wathen (TMFValueMagnet )

I think stock investors can benefit by analyzing a company with a credit investors' mentality -- rule out the downside and the upside takes care of itself. Send me an email by clicking here , or tweet me .

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* // Jun 29, 2018 at 12:00PM * // Financials

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Why Wells Fargo Is Down 12% in 2018

A so-so banking sector and a damaged reputation have weighed on the bank.

Matthew Frankel, CFP (TMFMathGuy ) Nov 10, 2018 at 7:22AM

It wasn't too long ago that *Wells Fargo* (NYSE: WFC) was regarded as the best of the big U.S. banks. Profitability and efficiency were well above that of peers, and asset quality was top-notch.

Times have changed. A little over two years have passed since news of the bank's now-infamous fake-accounts scandal broke, and Wells Fargo is still trying to recover. When you combine the lasting effects of the bank's bad behavior with a so-so financial sector, it's no wonder that Wells Fargo has significantly lagged the market. Not only is the bank's 12% drop in 2018 about 16 percentage points lower than the *S&P 500*'s performance, but it also trails the banking sector by a big margin. Here's what investors need to know.

Wells Fargo branch exterior.

Image Source: Wells Fargo.

The banking sector has been a market laggard

One reason Wells Fargo has underperformed in 2018 is that the banking sector has been an underperformer. While the S&P 500 is up by 5% for the year, the financial sector is down by more than 2%.

^SPX Chart

^SPX data by YCharts .

There are a few possible reasons for this. For one thing, bank stocks have /soared/ in 2016 and 2017 as a result of positive catalysts like the outcome of the 2016 election, the passage of tax reform, and the generally strong U.S. economy. In a nutshell, as we headed into 2018, there were a lot of high hopes already priced in.

In addition, rising interest rates haven't translated to higher profits for banks, at least not to the extent that investors had hoped. Despite a string of Federal Reserve rate hikes, longer-term interest rates haven't moved too much, and bank interest margins haven't expanded by a great deal. Wells Fargo's net interest margin is up by just eight basis points over the past year -- not tremendous considering how fast the Fed's rate hikes have been occurring. f

Fallout from Wells Fargo's scandals still lingers

While Wells Fargo's most recent earnings report was admittedly the bank's best in some time, the effects of the fake-accounts scandal and subsequent other scandal revelations are still very apparent. For example, while most banks experienced significant deposit and loan growth over the past year, Wells Fargo's have declined.

WFC Total Deposits (Quarterly) Chart

WFC Total Deposits (Quarterly) data by YCharts .

Efficiency and profitability are down significantly as well, and Wells Fargo has lost its lead in those categories among the big banks. There's also the ongoing possibility of legal expenses related to the numerous scandals that investors need to consider.

Should you invest in a bank that's not allowed to grow?

On top of the reputational damage, perhaps the worst problem Wells Fargo is facing is the penalty levied by the Federal Reserve . If you aren't familiar, the short version is that Wells Fargo is not allowed to grow larger than its asset size at the end of 2017 until "substantial improvements" are made.

To be fair, there are some highly regarded investors who have spoken in support of Wells Fargo as an investment. Most notably, Warren Buffett, whose *Berkshire Hathaway *(NYSE: BRK-A) (NYSE: BRK-B) owns nearly 10% of Wells Fargo's stock, has said that he thinks Wells Fargo will be the /best/ performer of the big banks over the next decade or so.

And Wells Fargo's management, including CEO Tim Sloan, is doing an excellent job of trying to rebuild the public's perception of the bank.

While Buffett may be right and Wells Fargo might ultimately be successful in moving past the scandals, it can still be difficult to justify buying Wells instead of one of the other big banks right now. The stock isn't particularly cheap even after the drop, the long-term impact of the scandals aren't fully known yet, and for the time being, this is a bank that isn't allowed to grow in what's arguably the best growth environment for banks in decades.

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Author

Matthew Frankel, CFP (TMFMathGuy )

Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage! Follow @TMFMathGuy