Rafferty's Dick Bove Downgrades Wells Fargo To Sell

With bank stocks “no longer rallying,” Rafferty Capital’s Dick Bove doesn't expect bank stock to do well for some time.

The analyst downgraded Wells Fargo & Co WFC from Hold to Sell, while lowering the price target from $62.00 to $54.50.

Phantom Account Problem

Bove believes that “if the points raised in the recently released Directors report entitled the Wells Fargo Sales Practices Investigation Report are understood, it will be further understood that this company is in the midst of a multi-year re-structuring process that will impact earnings performance.”

The analyst mentioned that the report primarily focused on the phantom account issue, providing a detailed review of the problem that occurred at Wells Fargo.

However, Bove noted the details of the issue also indicate the company might be “too big to be managed.”

“Wells Fargo was aware of the problem beginning in 2002. Management was given a thorough explanation by 2004. The problem was highlighted in multiple reports in following years. However, the executive decision was made that since the bank was a “retail store” it should be viewed as such. Therefore, the problems that had surfaced were more or less an acceptable cost of doing business,” the analyst explained.

Related Link: Q1 Earnings Kick Off: Can Big Banks Reignite Sagging Rally In The Space?

Who Is To Blame?

The report highlights the failures of the Human Resources, Audit, Corporate Risk, Internal Investigations and Law departments to effectively deal with the problems. In addition, it also shows that in some instances, the failure was due to an case-wise approach, along with an unwillingness to look at the larger picture.

Bove believes this demonstrated a weakness in the IT operations, as well as the above departments named by the report.

The report goes on to say there were lies created by high level executives and that the Board was lied to.

“It indicates that the various non-sales divisions were simply ignored when they set out corrective procedures. In sum, it was made clear that the goal was sales and that impediments to that goal whether ethical or lacking in ethics would not be listened to,” the analyst stated.