Wells Fargo Staggers on Regulations - Analyst Blog

In a recent second quarter 2010 results filing with the Securities and Exchange Commission, Wells Fargo & Co. (WFC) has reiterated its revenue loss projection based on the implementation of the legislative and regulatory initiatives such as Regulation E amendments and the Credit Card Accountability Responsibility and Disclosure Act (the Card Act). 

The amendments to Regulation E, among other things, impact the overdraft fees charged by Wells Fargo beginning on July 1, 2010. Wells Fargo estimates the amendments to the overdraft rules and its own voluntary policy changes will lower its after-tax fee revenue in the third quarter by $225 million and in the fourth quarter by $275 million.

The enactment of the Card Act influences Wells Fargo’s ability to change interest rates and assess certain fees on card accounts. The company estimates this act to cost $30 million after-tax in the third quarter. Wells Fargo had stated these estimates earlier at the time of the second quarter 2010 earnings release.

Wells Fargo also said in the filing that the recent financial regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act involve many provisions, which would become effective later and their impact would be realized after a relatively longer period. The company believes that such regulatory changes may have a negative impact on the company’s revenue, alter its business practices, increase capital requirements and impose additional charges.

Similar to Wells Fargo, U.S. Bancorp (USB) also expects the overdraft legislation to reduce revenue by $170 million to $220 million and the Card Act to lower revenue by approximately $120 million to $140 million in the second half of 2010.

Citigroup Inc. (C) estimates the Card Act to have a net pre-tax impact of $400 million to $600 million this year on the Citi-branded side business. The company expects its Retail Partners business to have an impact of $150 million to $200 million given the new provision with the vast majority of the 2010 impact occurring in the second half of the year.

We believe that the recent financial regulations will have a negative impact on the both the top line and the bottom line results of these companies. Though some of the provisions and their effects are to be felt later, we believe that the second half results will be a good indicator of those impacts. However, economic improvement and strategic initiatives employed by these companies would help them pull through, in the second half of 2010

All these companies – Wells Fargo, U.S. Bancorp and Citigroup – are currently rated as Zacks #3 Rank (Hold), implying no clear directional pressure on the stocks over the next one–to–three months. These stocks also have Neutral recommendations from us in the long term.

 
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