Wells Fargo ordered to pay $3.7 billion for past scandals. Here's why we see it as a positive

Published Tue, Dec 20 20225:00 PM ESTUpdated Tue, Dec 20 20226:37 PM EST

The U.S. government's consumer watchdog agency announced Tuesday that it ordered Wells Fargo (WFC) to pay $3.7 billion in connection with the bank's previous wrongdoing, a sizable penalty but one that represents progress toward eventually removing a dark regulatory cloud that's been hanging over the bank for years. The settlement stems from a host of customer abuses in key Wells Fargo product lines including auto loans and mortgages, as well as illegal surprise overdraft fees and bank account freezes, according to the Consumer Financial Protection Bureau (CFPB). Wells Fargo will pay a $1.7 billion civil penalty and more than $2 billion to the "over 16 million affected consumer accounts," the CFPB said. Wells Fargo has already paid out some of that $2 billion, the bank told Jim Cramer. Wells Fargo has long made clear it was being investigated by the CFPB, so Tuesday's announcement wasn't a complete shock. However, the magnitude of the penalty had not been known until now. Shares of Wells Fargo dropped roughly 2% to just under $41 each. At one point shortly after Tuesday's open on Wall Street, the stock had traded modestly higher. "This is a situation where it just seems endless," Jim said Tuesday morning on CNBC, referring to the many investigations, consent orders and fines that Wells Fargo has faced in recent years. "The question is, 'How far does this put them along in terms of all the other things they've done? This is the big one," he added. When the news hit Tuesday morning, there was a lot of confusion around the numbers. Technically, the bank was ordered to pay $3.7 billion. However, Wells Fargo had already reserved, or set aside, more than half of that. Jim's follow-up conversations with the bank indicate that when it's all said and done, the total figure to move on from these issues could be even larger, closer to $5.5 billion. Big picture, we think this is incrementally positive for Wells Fargo as CEO Charlie Scharf works to clean up the bank and satisfy regulators' demands following scandal-ridden years under previous management. Scharf became CEO in October 2019 , and he's overseen the end of numerous consent orders implemented by regulators, including the CFPB and Office of the Comptroller of the Currency. Following Tuesday's CFPB action, Wells Fargo said Tuesday it expects to record a $3.5 billion operating losses expense in the fourth quarter, including the "incremental costs of the CFPB civil penalty and related customer remediation as well as amounts related to outstanding litigation matters and other customer remediation." The Club took a stake in Wells Fargo in January 2021, knowing it would take time for all these regulatory issues to be resolved, including the most burdensome one: a Federal Reserve-imposed asset cap of $1.95 trillion. Wells Fargo is a turnaround story. Implemented in 2018 after years of scandals, the asset cap hampers the bank's ability to issue new loans. It's impossible to know exactly when it will be lifted. Some think it could happen in late 2023. In any case, that's why developments like Tuesday — which put other regulatory overhangs in the rearview mirror — are beneficial in the grand scheme of things. "While we do not see today's action as having a direct read-through to the asset cap and its potential removal, we would take today's announcement as a sign of positive progress on moving toward that ultimate goal," analysts at Jefferies wrote Tuesday. Bottom line For the Club, we think Wells Fargo looks attractive at these levels, and we have a 1 rating on the stock. The bank continues to work on reducing expenses across its businesses through improved efficiency, which is good for profitability. Additionally, Wells Fargo's large customer deposit base allows the bank to grow earnings as interest rates rise. While recessions typically aren't good for banks, we don't see the U.S. economy taking that severe of a downturn next year. We're encouraged that Wells Fargo's credit quality remained strong, as of its third-quarter results , which were released back in October. This bolsters our conviction in the name, combined with the aforementioned steps to grow earnings and the step-by-step clearing of regulatory overhangs. (Jim Cramer's Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Rick Wilking | Reuters