Wells Fargo & Co. (WFC) raised its estimate for potential litigation expenses, according to the quarterly regulatory filing with the Securities and Exchange Commission.
The company now estimates that in addition to its reserves it may require up to $1.7 billion in legal losses, up from $1.2 billion estimated in the previous quarter. The estimate for excess litigation costs crept up primarily due to Wells Fargo’s foreclosure related issues.
Last month, Wells Fargo and some of the other Wall Street biggies such as Bank of America Corporation (BAC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) were hit with orders from regulators for addressing a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing.
The regulators wanted these organizations to improve the process by making significant revisions to certain residential mortgage loan servicing and foreclosure processing practices.
In addition, other government agencies, including state attorney generals and the U.S. Department of Justice, continue to investigate various mortgage related practices of Wells Fargo and other major mortgage servicers.
While Wells Fargo continues to cooperate with these investigations, according to the company’s filing, such investigations could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs in response to government investigations and additional litigation.
While the foreclosure and certain other regulatory issues remain concerns for Wells Fargo, we believe that leverage from expense control initiatives, lower integrations expenses and balance sheet strength would help the company navigate the current challenging environment.
Additionally, with improving economic conditions, a promising credit quality outlook and a strong business model, Wells Fargo promises earnings growth. The capital deployment initiatives further inspire investors’ confidence in the stock.
Currently, Wells Fargo shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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