Will Wells Fargo's Community Lending Rating be Downgraded?

U.S. banks’ regulator, Office of the Comptroller of the Currency (OCC), might downgrade Wells Fargo & Company WFC on a national scorecard for community lending, according to Reuters. The U.S. lender might be downgraded by two notches to "needs to improve" from "outstanding" under the Community Reinvestment Act (CRA).

Notably, the CRA Act was created for promoting lending to poor neighborhoods, under which Wells Fargo had been rated "outstanding" since 2008. The OCC’s decision is due in early Jan 2017 for downgrade.

Spokesperson for Wells Fargo declined to comment on “speculation” and spokesperson for the OCC also refrained from commenting.

"Wells Fargo has originated more home loans over the last six years across all key categories — including loans to African-Americans, Asians, Hispanics, Native Americans, low- and moderate-income borrowers and residents of low- and moderate-income neighborhoods — than any bank in America," Wells Fargo said.

"Over the past four years, Wells Fargo provided nearly $500 million in grants to charitable organizations focused on community development in distressed communities, including affordable housing, homeownership counseling, financial education, workforce development and job creation," the bank said.

Since Sep 2016, Wells Fargo has been in trouble as the scandal related to illegal opening of millions of unauthorized accounts to meet the aggressive internal sales goals surfaced. Notably, the company neither admitted nor denied the allegations.

Following the financial crisis in 2008, the OCC faulted several national banks for their community lending. Among others, Bank of America Corporation BAC was downgraded from "outstanding" to “satisfactory” grade in 2011 for "discriminatory or other illegal credit practices."  Further, JPMorgan Chase & Co. JPM was down one notch from "outstanding" to "satisfactory" in 2013.

Therefore, such downgrade in rating, blemishing the reputation of the bank, is likely to restrict expansion in the short term. Moreover, Wells Fargo would have to pass through greater regulatory scrutiny, even for acquisitions and branch openings.

However, post scandal, the bank has undertaken many steps to restore its reputation. It initiated an internal probe and hired a consultant to review sales practices. Moreover, management proposed to eliminate sales goals for its retail banking business, earlier than planned.

While the current crisis at Wells Fargo will take some time to alleviate, we believe that continued growth in loans and deposits, and expansion moves should support its growth profile, going forward. Further, investors’ belief on the bank can be seen in the share price movement. Shares have climbed 13.6% since Sep 2016 to date.

Currently, Wells Fargo carries a Zack Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock, Comerica Incorporated CMA, has been witnessing upward estimate revisions for the last 60 days. Further, the stock has surged over 65% so far this year. It currently holds a Zacks Rank #2 (Buy).

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