Shares of Wells Fargo (WFC) were slammed Monday as investors got their first chance to react to Federal Reserve Chair Janet Yellen's for its pattern of consumer abuses, saying the bank could not grow until it cleans up its act.
Shares of the San Francisco bank were off nearly 7 percent amid a slew of downgrades by firms including Morgan Stanley, J.P Morgan, Keefe, Bruyette & Woods and RBC Capital Markets.
Beyond being "credit negative for Wells Fargo," the Fed's sanctions could prompt a further loss of clients, and further damage the Wells Fargo brand, "especially since competitors will likely use Wells Fargo's hobbled status to attract clients for themselves," noted analysts at Moody's Investors Service.
Regulators cannot stand by "pervasive and persistent misconduct at any bank," Yellen said in a statement issued at the, saying the bank's misdeeds warranted an unprecedented sanction.
Wells Fargo's bad behavior includes a sales operation that created millions of phony accounts on behalf of unknowing consumers, as well as charging unwarranted fees on auto insurance and mortgage loans.
Wells Fargo can't increase its total assets above where they stood at the end of last year without first getting approval from the Fed. Wells Fargo said after-tax profit in 2018 would be cut by as much as $400 million.
Yellen also sent a letter on Friday to Sen. Elizabeth Warren, the Massachusetts Democrat who has been a fierce critic of Wells Fargo and the banking industry at large. Limiting the financial giant's growth "is unique and more stringent than the penalties the board has imposed against other bank holding companies for similar unsafe and unsound practices," Yellen told Warren in a letter on Friday.
The Fed chair's decision "demonstrates that we have the tools to rein in Wall Street -- if our regulators have the guts to use them," Warren said in a statement. "The massive fraud at Wells Fargo showed the whole country that we need more accountability on Wall Street."
One analyst took a longer view of what the Fed's action means for Wells Fargo and the banking sector.
"We see the Federal Reserve freeze on Wells Fargo's growth as less of a debacle than the initial reaction might suggest," Cowen analyst Jaret Seiberg wrote in a client note. "The Federal Reserve enforcement effort will create political capital that the agency can use to justify regulatory relief for big banks and Congress can use to enact regulatory relief legislation."