UBS Tells Investors To Sell Wells Fargo Stock, Sees Credit Risks Not In Valuation

UBS’ Brennan Hawken initiated coverage of Wells Fargo & Co WFC with a Sell rating and price target of $45.

“We see risks to WFC's revenue growth and credit performance, which coupled with a valuation on the high end of peers and consensus estimates that have not come down much, puts WFC shares at risk of underperformance in our view,” Hawken mentioned.

Revenue Growth Risk

The analyst pointed out that due to limited rate upside, fee revenue could lead to uncertainties regarding the company’s revenue expectations.

Since mortgage revenue was unlikely to lead to revenue strength in the near term, it would become increasingly important for Wells Fargo to grow WIM revenues. However, low retail risk appetites and beta headwinds are likely to pressure WIM revenues in 2016.

Credit Risk

In addition, Hawken stated that Well Fargo’s high exposure to mass affluent clients suggested that the company was more exposed to downside risk from the pending DOL fiduciary proposal. “Credit also appears to be a greater risk than WFC's reputation would suggest,” Hawken noted.

While the company’s energy portfolio seemed more skewed than expected toward risky loans, Well Fargo’s earlier credit performance has been consistent with peers, but not superior.

“In the consumer portfolio, WFC is a leading auto lender and our analysis suggests this portfolio is riskier than most of its large bank competitors,” the UBS report said.

Hawken also expressed concern regarding earnings headwinds from the card portfolio when the credit cycle turns.