S&P Revises Wells Fargo (WFC) Outlook to 'Negative'

October 18, 2016 4:48 PM EDT

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(Updated - October 18, 2016 4:50 PM EDT)

S&P Global Ratings said today it revised its outlook on Wells Fargo & Co. (NYSE: WFC) and the company's main operating subsidiaries, including Wells Fargo Bank N.A., to negative from stable.

At the same time, we affirmed the 'A/A-1' issuer credit ratings on Wells and the 'AA-/A-1+' issuer credit ratings on Well's main operating subsidiaries. The group credit profile remains 'a+'.

"Our outlook revision reflects the increased business risks for Wells over the past few weeks, stemming from accelerated reputational issues from the Sept. 8 news of the company's retail accounts sales misconduct over recent years," said S&P Global Ratings credit analyst Barbara Duberstein. Uncertainty has increased, in our view, regarding the scope and ramifications of the misconduct, the duration and magnitude of the reputational damage, the possible impact on the company's customer flows, and the potential consequences of ongoing legal and regulatory investigations. Additionally, the company's management team and retail business model are unexpectedly in transition as a result of this misconduct, and this may lessen our view of the company's business stability relative to highly rated peers.

Wells will likely continue to face significant business challenges for at least several months. We believe that the company's settlement with the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and Los Angeles City Attorney of $185 million, which is very small relative to the company's financial strength, may not sufficiently capture the damage caused by the retail sales misconduct. A number of ongoing internal and third-party investigations could reveal additional inappropriate practices at the retail bank, given the company's very large size and aggressive sales culture and emphasis on cross-selling that has persisted for several years. For example, the company's independent directors have hired a law firm to assist in an independent investigation.

The company has also expanded the scope of its customer account review and remediation to include 2009 and 2010. Importantly, the company disclosed that the U.S. Justice Department, state attorneys general, and U.S. Congressional committees have undertaken formal or informal inquiries, investigations, or examinations regarding the retail sales practices. We continue to believe that any additional fines and legal restitution will not be large relative to the company's substantial earnings. Still, these investigations will likely be prolonged and could cause additional reputational damage, which is not reflected in our current ratings. In addition, we believe that Wells could be subject to more intensified regulatory scrutiny overall.

Our negative outlook reflects the possibility that we could lower our ratings on Wells over the next two years. We could lower the ratings if the retail sales practices issue becomes even more material to the company's overall credit profile. This could occur if investigations reveal additional misconduct or risk management lapses, if we expect any substantial additional fines that are large relative to earnings, or if other sizable compliance or governance weaknesses surface. We could also lower the ratings if reputational risks intensify, if customer flows in key businesses show negative trends for a sustained period, if trends at the retail bank become less stable, or if additional management turnover increases strategic uncertainties.

We could also lower our ratings if Wells displays a sustained, elevated risk appetite that is not consistent with the high rating; for instance, if loan growth accelerates or if the company pursues additional substantial loan portfolio acquisitions (which we do not believe is feasible at this time). In particular, we would negatively view accelerated growth in higher risk areas such as nonprime auto, leveraged lending, or capital markets businesses. We could lower the ratings if nonperforming assets or credit losses rise significantly or if capital ratios decline as the result of more aggressive dividend or share buyback policies.

Over the longer term, we could revise the outlook to stable if we expect that the outstanding investigations will not adversely affect our view of the company's otherwise very strong business position, if reputational issues subside and legal issues appear manageable, and if the company's customer flows and market share are stable.

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