Wells Fargo & Co WFC received a cease-and-desist order Friday from the Federal Reserve that will limit asset growth to $1.95 trillion pending compliance, board oversight and risk management improvements.
The threat to net income prompted a number of Monday downgrades, with Morgan Stanley and JPMorgan assigning Underweight ratings and Citigroup and Keefe, Bruyette & Woods downgrading to Neutral or Market Perform.
The Initial Pain
Wells Fargo’s net income impact could extend beyond reduced deposits to include other revenues from institutional clients that are shifted to rival banks for comprehensive services, according to JPMorgan.
Analyst Vivek Juneja said he expects tightened expansion of the investment banking and trading segments, as well as pain in other areas.
“The harsh Fed consent order is rare and a strong sign of regulators’ frustration about the very wide swath of areas where Wells has had issues,” Juneja said, referencing struggles with consumer deposits and lending, small business banking and merchant acquisition.
JPMorgan downgraded Wells Fargo from Neutral to Underweight with a $67 price target.
A Shift In Strategy
Keefe, Bruyette & Woods’ previous estimates for Wells Fargo had assumed aggressive expansion that is now stunted.
JPMorgan said Wells Fargo plans to contract its trading assets and low liquidity value deposits by $50 billion to $75 billion to support loan and core deposit growth, and the research firm anticipates reconsideration of planned branch closures.
A Sign Of Things To Come
JPMorgan's Juneja said that other federal investigations — including from the Department of Justice, the Securities and Exchange Commission and the Department of Labor — could result in tightened restrictions.
Keefe, Bruyette & Woods does not expect additional regulatory pressure but remains uncertain about the timeline around the cease-and-desist order.
“The bottom line is that the C&D order will mean Wells will have a harder time maintaining market share and will have to compete more on price or credit terms versus peers, in our view,” analyst Brian Kleinhanzl said in a note.
The bank must submit action plans for improvements by Sept. 30 and subsequently concede to two third-party reviews before Fed restrictions are lifted. JPMorgan expects limitations at least through the end of 2018, but Height Securities’ most optimistic outlook sees pain for Wells Fargo through 2021.
Price Action
At the time of publication, shares were trading down 7.29 percent at $59.40.
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