CRA downgrade is least of Wells Fargo's problems

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Wells Fargo's subpar community reinvestment score from federal regulators is another black mark on a tarnished public image, but the rare two-notch downgrade is unlikely to have a significant impact on the $1.9 trillion-asset bank’s financial performance.

“In general, it’s a nonevent,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods.

In a securities filing Tuesday, Wells Fargo disclosed several ways that its bottom line could suffer as a result of the long-awaited downgrade. Wells indicated that the low score could hurt its ability to engage in mergers and acquisitions and to open new branches, and could prompt some government agencies that are customers of the bank to cut ties.

But analysts shrugged off those new restrictions, largely because Wells has already been retrenching. The San Francisco bank recently announced plans to close more than 400 branches by the end of 2018. And it is not seen as likely to pursue large acquisitions anytime soon, especially given regulators' concerns about "too big to fail."

“So outside the negative headline of the lower rating, the ramifications to investors from this exam will likely be negligible,” analysts at Sandler O’Neill wrote in a research note.

Kenneth Thomas, president of Community Development Fund Advisors, agreed.

“On paper, it looks like a lot. They can’t expand,” he said. “Well, they weren’t going to expand anyway.”

Wells Fargo’s low score — the bank “needs to improve” its compliance with the Community Reinvestment Act, in the words of the Office of the Comptroller of the Currency — stemmed from a rash of regulatory violations between 2011 and 2016.

The OCC cited 10 specific cases, including last fall’s phony-sales scandal, allegations that minority borrowers were steered into subprime mortgages, and a finding of discrimination against employees who were pregnant or on maternity leave.

After Tuesday’s announcement, four of the nation’s 50 largest banks have a poor CRA score. The other three institutions deemed in need of improvement are Santander Bank, Regions Bank and Fifth Third Bank.

Wells is seeking to have its next exam expedited, which could minimize the time that it spends in the penalty box.

Thomas said it is unlikely that Wells Fargo will win back its previous “outstanding” score in its next CRA exam. But he noted that banks are often content with a “satisfactory” score, and said Wells has an opportunity to get back to that level.

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CRA Crime and misconduct Law and regulation M&A Wells Fargo OCC