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Why Wells Fargo Stock Outperformed on Thursday

Shares of Wells Fargo (NYSE: WFC) climbed 1.6% on Thursday, roughly double the gain in the broader market, as a changeover at the top of the bank industry's newest regulatory body could help the nation's third biggest bank by assets put last year's fake-account scandal in the rearview mirror.

Metal gears, with compliance-related words etched on top.
Metal gears, with compliance-related words etched on top.

Image source: Getty Images.

A changing of the guards

Earlier this week, the current head of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, said that he plans to leave his post by the end of the month. Cordray has led the agency for six years, cracking down hard on banks that run afoul of consumer rules and regulations.

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"It has been a joy of my life to have the opportunity to serve our country as the first director of the Consumer Bureau by working alongside all of you here," Cordray told employees. "I trust that new leadership will see that value also and work to preserve it -- perhaps in different ways than before, but desiring, as I have done, to serve in ways that benefit and strengthen our economy and our country."

The CFPB's aggressive posture under Cordray is almost certainly bound to change. On Thursday, it was reported that President Donald Trump will appoint Mick Mulvaney to run the CFPB.

Mulvaney is currently in charge of the Office of Management and Budget, a position he will keep while serving as the interim director of the CFPB. Mulvaney is a known critic not only of the heightened regulatory environment in the financial services industry since the financial crisis, but of the CFPB, in particular.

The net result is that banks could soon see the CFPB ease its oversight of banks. One could argue whether this is good for consumers or not, but there's no question that it's a positive development for banks.

Unlike the other prudential regulators in the bank industry -- the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency -- the CFPB isn't tasked with maintaining the safety and soundness of the bank industry. Its sole concern is on reducing harm to consumers from illicit financial practices.

By design, it's innately antagonistic to banks. And few banks have been impacted more heavily by this than Wells Fargo.

Wells Fargo's fake-account scandal

In September of last year, the CFPB revealed that thousands of Wells Fargo's branch-based employees had spent years opening millions of accounts for customers without the customers' approval to do so. At the time, it may not have seemed like a material issue for Wells Fargo, as the $185 million fine announced by the CFPB in conjunction with other governmental bodies amounted to a small fraction of the $5.6 billion earned by Wells Fargo that same quarter.

But it soon became clear that the $185 million fine was just the tip of the iceberg in terms of consequences. Since then, the bank has replaced its CEO, missed out on much of the post-presidential election rally in bank stocks, uncovered similar practices in other areas of its business, and had its reputation severely maligned.

The net result is that Wells Fargo has not only seen its revenue take a hit, falling in the latest quarter on both a sequential and year-over-year basis, but its expenses are on the rise, as well. Most recently, the California-based bank earned $4.6 billion in the third quarter. That was down 21% from the second quarter, and it was off 19% relative to the year-ago period.

Consequently, when you trace all of this back to the CFPB's revelation last year, it seems logical that shares of Wells Fargo would outperform other bank stocks given the impending changeover at the top of the industry watchdog.

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John Maxfield owns shares of Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.