The credit rating giant Standard & Poor’s downgraded Wells Fargo on Wednesday as a result of the extraordinary regulatory penalties recently imposed on the San Francisco bank.

S&P’s action came five days after the Federal Reserve Board hit Wells with a cap on asset growth. The cap will remain in place until the $1.95 trillion-asset bank improves its governance and controls to the Fed’s satisfaction. Wells also agreed to replace four members of its board of directors.

The one-notch downgrade reflects S&P's view that Wells faces greater regulatory risk than was previously believed. Wells is facing close scrutiny in the wake of revelations that thousands of its employees opened as many as 3.5 million unauthorized customer accounts.

Tim Sloan, chief executive officer and president of Wells Fargo, arrives to testify before a Senate Banking, Housing and Urban Affairs Committee hearing in Washington.
The Federal Reserve has barred Wells Fargo from adding assets until it improves its governance. CEO Tim Sloan said this week that he expects the cap to be lifted by the end of 2018. Bloomberg News

“This unprecedented asset cap on a large bank underscores the continued elevated regulatory risks for Wells, and the ongoing ramifications of its retail sales and practices issues, as well as the complexities of improving compliance and operational risk controls throughout its very large organization,” S&P stated in a report.

S&P reduced its long-term issuer credit rating for Wells Fargo’s holding company from “A” to “A-.“ The firm also cut the same rating for Wells Fargo Bank from “A-1” to “A-2.”

The New York-based ratings firm said that it continues to view Wells Fargo’s business position as a key strength, and that it does not expect the asset cap to impose significant harm on the bank’s competitive standing in key businesses. Standard & Poor’s also said that its outlook for Wells Fargo is stable.

At the same time, S&P acknowledged that the asset cap could modest hurt the bank’s short-term competitive position in certain commercial businesses. Wells Fargo expects its 2018 net income to take a $300 million to $400 million hit as a result of the Fed’s action.

The key question now is how long the asset cap will remain in place. Wells CEO Tim Sloan said Monday that he believes the restrictions will likely be lifted by the end of this year. If the asset cap remains in place in 2019, the bank’s stock price, which has fallen by more than 11% since Friday, will likely suffer further.

“We could lower the ratings if Wells does not meet the requirements under the Fed’s regulatory consent order, if the asset cap is not lifted in a reasonable timeframe, or if Wells’ market shares erode significantly — developments we do not currently expect,” S&P said.

Another large credit rating firm, Moody’s Investors Service, said earlier this week that the Fed’s sanctions are likely to increase customer attrition at Wells Fargo, since competitors will use the bank’s hobbled status to poach clients.

S&P’s downgrade is its fourth for Wells Fargo since the throes of the financial crisis in early 2009, when the bank had a sparkling AA rating.

While S&P’s action could have a negative impact on Wells Fargo’s borrowing costs, it brings the embattled bank in line with the ratings of two of its main competitors, JPMorgan Chase and Bank of America.

U.S. Bancorp currently has a higher rating from S&P than Wells Fargo, while Citigroup, Goldman Sachs and Morgan Stanley all have lower ratings.

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Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.