Analysts Lower Wells Fargo Rating, Saying Road To Recovery Will Be Tough

Analysts at UBS Securities lowered Wells Fargo’s rating and earnings forecast, saying the bank will have a tougher time bouncing bank from the coronavirus pandemic — more so than other financial institutions (FIs).

In a UBS research document released on Monday (May 4), analysts lowered Wells Fargo’s rating from Neutral to Sell, stating that the bank doesn’t have enough funds to protect it from pandemic-related losses, according to a Barrons report.

The analysts also lowered Wells Fargo’s earnings forecast to 47 percent in 2020 and 18 percent for 2021. In terms of overall banks in the U.S., UBS slashed forecasts for 2020 by 25 percent and 18 percent in 2021.

“[A] low earnings base means incremental revenue and expense headwinds have a disproportionately large percentage point impact on earnings,” said UBS analyst Saul Martinez said regarding Wells Fargo.

Martinez indicated that the bank can’t fill out its balance sheet with more loans because of the Federal Reserve cap imposed on Wells Fargo following the 2016 fraud scandal. The bank was given the go-ahead to extend Paycheck Protection Program loans but cannot keep any of the fees.

Further, Martinez indicated that Wells Fargo’s net interest income will drop 6.5 percent this year. He also criticized the bank for not having an adequate allowance for credit losses under the new Current Expected Credit Losses framework.

Wells Fargo admitted to analysts in an April call that its loan-loss reserves were less than other FIs, according to the Barrons report.

Martinez said he doesn’t think most banks have enough loan-loss reserves, given the fact that commercial credit quality is forecasted to crumble. Total losses for commercial and industrial loans were 3.6 percent to 3.8 percent in the “nine quarters following the last three recessions.” Banks’ own expectations for C&I losses were 1 percent to 1.7 percent.

“Ultimately, though, we think banks will need to increase reserves materially as the magnitude of C&I losses becomes visible,” Martinez wrote.

In February, Wells Fargo agreed to pay $3 billion as a settlement with regulators over a scandal involving the creation of fake accounts.