Fed restrictions continue to badger Wells Fargo; U.S. banks down

By Aparajita Saxena

(Reuters) - Wells Fargo & Co's shares fell as much as 9.4 percent to $58.05 on Monday, sparking a sector-wide sell off after the Federal Reserve imposed regulatory restrictions on the bank, forcing it to improve its governance and controls in the wake of the sales scandal.

Bank of America fell nearly 2 percent, Citigroup fell 1.5 percent, while JPMorgan and Morgan Stanley dipped nearly 0.8 percent in early trading.

"Banks generally respond well to higher rates/inflation but I do think the WFC news is taking down the entire large cap bank tape this morning," said RJ Grant head of trading at Keefe, Bruyette & Woods in New York.

Wells Fargo, which posted its biggest intraday percentage loss in six and a half years, led losses on the S&P 500 index, down 0.18 percent.

U.S. stock markets fell last week after a broad-based pullback dampened investor sentiment.

The U.S. Fed on Friday told Wells Fargo it is not allowed to grow beyond the $1.95 trillion in assets it had at the end of last year "until it sufficiently improves its governance and controls".

Wells estimates the cap will cut its annual profit by $300 million to $400 million this year, as it reduces some parts of its balance sheet, like corporate deposits and trading assets, in order to continue growing core businesses.

While the market has largely hailed the restrictions on Wells as necessary for making amends, many see the tightening as bringing the regulatory spotlight back to banks, especially at a time when the financial sector has been calling for relaxing federal regulations and scrutiny.

"...we have long said that regulator-imposed restrictions on growth (M&A, branch openings, capital return) is not a good thing," said Barclays analyst Jason Goldberg.

"This action (against Wells Fargo) is severe and unprecedented for a large, sound bank. Though we believe this situation will be manageable, it will clearly keep WFC in the penalty box for a bit longer," he added.

Regional banks also fell, tracking large-cap banks' shares. The KBW Regional Banking index slipped 0.7 percent. SunTrust Banks Inc and M&T Bank Corp fell around one percent each, while Comerica Inc and State Street Corp dipped 0.6 percent each.

"I think some concerns might be creeping into the group given this enforcement from the regulators. The Fed is definitely messaging that the industry shouldn't take regulators lightly and that enforcement is going to be harsh if you cross the line," KBW's Grant said.

(Reporting By Aparajita Saxena in Bengaluru; Additional Reporting by Sinead Carew in New York)