Bank-on-Bank ‘Sell’ Rating for Wells Fargo

It’s always interesting to see how bank analysts feel about other banks – they are usually pretty blunt. Today we have a new bank opinion on Wells Fargo (NYSE: WFC)… and it’s not pretty.

UBS analyst Brennan Hawken launched coverage on Wells Fargo with a ‘Sell’ rating and a price target of $45, or 10% below the current price.

Hawken sees risks to Wells Fargo’s revenue growth and credit performance.  The analyst said given the limited upside from rates, they see fee revenues as the greatest component of uncertainty in WFC’s revenue forecasts.

Also, with mortgage revenues unlikely to be a source of revenue strength for some time, growth in Wealth and Investment Management (WIM) revenues is increasingly important. However, beta headwinds and weak retail risk appetites are likely to weigh on WIM revenues this year. “Even beyond near-term headwinds, we believe WFC’s greater exposure to mass affluent clients means they are more exposed to downside from the pending DOL fiduciary proposal,” the analyst said.

Another big risk for Wells is credit:

“WFC is overweight C&I in its loan book, so the migration of credit stress beyond energy would represent a bigger risk for WFC than peers. WFC’s energy portfolio appears more biased to risky loans than we had expected, and their prior credit performance is consistent with, but not superior to peers (as their reputation would suggest). 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. Lastly, the card portfolio has grown rapidly and given the intense competition in that business we are concerned about the earnings headwind that portfolio may create when the credit cycle turns.”

Lastly, valuation is at the the high end of peers and consensus estimates have not come down much.  The firm’s $45 price target represents 11x  2017 EPS estimate of $4.10.  They believe shares should trade between the regional banks and money centers on a P/E basis.


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