Yesterday we added more shares of WFC, now representing 4.9% of the portfolio.

It has been a tough couple of days for Wells Fargo. After falling nearly 3% Monday along with the drop in Treasury yields (Wells Fargo is one of the most interest-rate sensitive banks in its group), shares pulled back an additional 5.6% in Tuesday's session after Bloomberg reported that the firm could face regulatory action from The Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau. According to the report, the two agencies are not satisfied with Wells Fargo's pace of compensating victims and improving its controls consistent with their consent orders.

After doing some digging we realized that this information was not completely new. Wells Fargo management has been highlighting this risk in past 10Q reports, saying, "The Company continues to work to address the provisions of the consent orders. The Company has not yet satisfied certain aspects of the consent orders, and as a result, we believe regulators may impose additional penalties or take other enforcement actions." Additionally, even though this could complicate the timeline of when the Federal Reserve lifts the asset cap it placed on Wells a few years ago, representing a delay of a key catalyst event bullish investors have been patiently waiting for, the rush of selling yesterday may have overlooked the fact that the potential sanctions could result in a fine and nothing more Supporting this was the research note published by analysts at Morgan Stanley last night. While the analysts acknowledged that it is "hard to know" whether a fine or a delay in the asset cap removal was the more likely outcome, the analysts said they think "a fine could be more likely given the Fed owns the asset cap removal decision and the Fed was not mentioned in the article. However, either scenario or both scenarios are possible. That said, it's unlikely that a fine would be as large as the market cap decline of over $12 billion yesterday."

We think the Fed not being named in the report could be something that investors overlooked yesterday. Ultimately, the Fed are the ones in charge of the asset cap. If they are satisfied with the progress that has been made -- like they reportedly were in February -- then it means Wells Fargo is still on the right path. That being said, management has always been quick to point out that the asset cap removal timeline has always been highly uncertain, and bumps in the process were always expected. Therefore, we think yesterday's news represented a speed bump at its worst and a fine at its best, and again, the resulting fine likely will not equate to the market cap that was lost.

The bottom line here is that we think the recent selloff in WFC has gotten overdone and the time has come to get more opportunistic with shares down roughly 10% week to date and 12% from the August high. Regulatory risk will always be a key watch item, but if a fine is the outcome here then we cannot imagine the penalty being anything near the $12 billion of market cap that was lost yesterday. Longer term, we continue to believe WFC will benefit from higher rates, continued progress on expense rationalization, and the eventual lifting of the asset cap. As we wait for these events to unfold, we believe Wells Fargo's robust capital return program ($18 billion share repurchase program with optionality for more, plus the dividend that was recently doubled) provides us with plenty of compensation for our patience.