By Ross Kerber
BOSTON - As Wells Fargo & Co enters the latest chapter in its long-running sales practices saga, Wall Street is trying to figure out how to make sense of new developments that do not affect profits very much but can send the bank's stock price careening.
On Friday, the U.S. Federal Reserve unveiled a consent order imposing a cap on Wells Fargo's balance sheet, as well as letters it sent to the bank's directors and two former chairmen criticizing them for weak oversight.
On Monday, Wells Fargo's share price fell 9.2 percent, more than twice as sharply as the market during a broad selloff.
The Fed's order followed two others issued by financial regulators in September 2016. Those were tied to a $190 million settlement over Wells Fargo employees creating millions of phony customer accounts to hit aggressive sales targets.
The Fed did not detail any new misdeeds at Wells Fargo, and executives said the order would reduce profits by less than 2 percent this year.
But the regulator's tough stance a full 514 days after the scandal erupted shows how hard it will be for Wells Fargo to shake it, investors and analysts said.
As the bank's asset and revenue growth has softened, it has been difficult to quantify how much is related to current regulatory actions and negative headlines about Wells Fargo's past behaviour, they said.
"The thing people are really struggling with is, what does this do to revenue?" Brian Foran, a bank analyst with Autonomous Research, said in an interview.
In a note to clients on Sunday, Chris Kotowski, an analyst with Oppenheimer & Co, wondered whether the Fed would go so far as to replace senior management, including Chief Executive Officer Tim Sloan.
"The distraction of the sales practices scandal continues and we fear will leave choppy financial performance in its wake," Kotowski wrote.
Wells Fargo spokesman Mark Folk referred Reuters to Sloan's earlier statements in which he expressed confidence the bank would meet the Fed's requirements and serve customers.
While other regulators punished Wells Fargo for consumer abuses, the Fed's action pertained to the board of directors, which the Fed has sole jurisdiction over, a Fed official said. It was months in the making and stemmed from a report the board released in April, as well as news articles. The Fed believes the punishment is appropriate given the scale of Wells Fargo's compliance failures, the official said.
During the scandal, Wells Fargo launched a broad review of sales practices, installed new executives and board members – including a new CEO and chair – changed incentive structures, overhauled risk management and compensated many customers who said they were harmed.
But the problems have not ended.
In July, Wells Fargo said it may have forced customers into unwanted products and improperly closed accounts or frozen funds. In October, the bank fired its head of consumer lending for disparaging comments about regulators, some of whom are still mulling enforcement actions.
It is unclear whether regulators appointed by President Donald Trump will be as aggressive in scrutinizing Wells Fargo as their predecessors, since Trump has pledged to ease regulatory burdens broadly.
Investors and analysts said they were sceptical that the bank was out of the woods yet, given the ongoing consent orders and outstanding regulatory probes. On the other hand, the weakened stock could be a bargain, some said.
Greg Donaldson of Donaldson Capital Management, a mid-sized holder of Wells Fargo shares, said the Fed action seemed deserved, even though he sees the stock price decline as an opportunity to buy more shares.
"I'm a great fan of Wells Fargo, but what they did was wrong," he said.
(Reporting by Ross Kerber in Boston; Additional reporting by Michelle Price in Washington; Editing by Lauren Tara LaCapra and Peter Cooney)