WFC Wells Fargo and Company

Bank's stock sinks in wake of enforcement action, wiping out $29 billion in market value

By Emily Glazer 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 6, 2018).

A selloff in Wells Fargo & Co. shares chopped $29 billion from the bank's market value after the Federal Reserve cast it into a regulatory purgatory and limited its ability to expand its business.

Shares tumbled 9.2% on Monday amid a broader selloff in stock prices, as analysts ratcheted down earnings estimates for the third-largest U.S. bank by assets. The decline, its sharpest one-day drop since April 2009, was especially painful because the recently bright outlook for banks was also thrown into question Monday.

The acute market declines shifted, at least for now, bank investors' optimism about stronger economic growth, rising interest rates and lighter regulation. The KBW Nasdaq Bank Index dropped 4.9%, slightly more than the 4.6% decline in the Dow Jones Industrial Average.

Still, Wells Fargo has been hit the hardest. Since the start of the year, Wells Fargo's shares have lost 4.2%, while its biggest peers have gained between 2% and 3%.

Meanwhile, the bank's price/earnings ratio has fallen below that of JPMorgan Chase & Co. and Bank of America Corp.

The challenge now facing Wells Fargo was on display Friday night in an analyst call held less than two hours after the Fed announced an unprecedented enforcement action and said the bank would replace four board directors by year-end.

Chief Executive Officer Timothy Sloan said five times on the call that the bank is "open for business."

Wells Fargo in its presentation to analysts Friday night said that it expected the Fed action to reduce 2018 after-tax profit by between $300 million and $400 million.

Such a reduction comes at an inopportune time for Wells Fargo. Over the past three quarters, the bank's net interest income -- a gauge of lending profitability -- has fallen. At the same time, the bank has been in the midst of an effort to cut $4 billion in annual costs by 2019.

In the wake of the Fed's growth cap, half a dozen analysts on Monday cut estimates for 2018 earnings per share to an average of $4.71 from a previous average of $4.83. Some of those analysts trimmed forecasts for 2019 earnings to an average of $5.16, down from an average of $5.40.

KBW bank analyst Brian Kleinhanzl downgraded Wells Fargo to "market perform" from "outperform" and lowered his 2018 earnings per share estimates to $4.70 from $4.90 and for 2019 to $5.10 from $5.45.

"The bottom line is that the [Fed] 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," he wrote.

Gerard Cassidy, an RBC Capital bank analyst, also voiced concerns about competition, writing that "existing customers could be pried away from the company by aggressive competitors." He added that given a positive outlook for the banking industry, investors would be better off owning JPMorgan, Bank of America or Citigroup Inc., which "will be able to harness the growth of the U.S. economy."

Wells Fargo executives said Friday that they would use a series of financial maneuvers to limit certain activities so the bank won't have to deny business to its large consumer base. But certain commercial customers could get squeezed.

For instance, the bank may reduce certain commercial deposits known as "nonoperational," of which it had roughly $200 billion as of the end of 2017. That is a tactic JPMorgan used to lower its asset size a few years ago.

Wells Fargo may also limit financial institutions' deposits, which tallied $149 billion at year-end 2017. And it could also reduce its $92 billion in trading assets and $91 billion in short-term investments as of Dec. 31, 2017.

Some analysts were more sanguine. Sanford C. Bernstein's John McDonald wrote Monday that the growth cap will be manageable because Wells Fargo "was already planning to continue shrinking...auto and home-equity loans." He estimates the two noncore portfolios will decline by about $15 billion this year, "creating additional flexibility" for the bank.

Overall, Mr. McDonald said he expects the impact of the Fed moves to go away by next year. He added the growth cap hadn't significantly altered his view of the bank, but he had been modeling just 1% loan growth in 2018.

Some investors were taken aback by the Fed's action and the fact the bank hasn't fully overcome the sales-practices scandal. Still, others were holding on.

Shareholder David Katz said the Fed's action is "sending another message to Wells that they've got to be more aggressive in getting their act together." But he said he was confident in the bank's approach to how it can "meet all the needs" of clients and manage the balance sheet.

Mr. Katz, who is president and chief investment officer at New York-based Matrix Asset Advisors Inc. that owns about 480,000 Wells Fargo shares, said the firm plans to hold its current position.

Shareholder Bill Smead said he wasn't happy about the bank's growth restrictions. But Mr. Smead, CEO of Seattle-based Smead Capital Management, also wasn't planning to sell any of his firm's roughly $78 million of Wells Fargo shares because "we haven't been losing money while we waited [for the bank to recover]...it's just been on a continuous march."

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

February 06, 2018 02:47 ET (07:47 GMT)

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