Analysts lower Wells Fargo rating
Analysts UBS Securities lowered Wells fargorating and earnings forecast, saying the bank will have a harder time recovering from the coronavirus pandemic – more so than other financial institutions (FIs).
In a UBS research paper released on Monday, May 4, analysts downgraded Wells Fargo’s rating from Neutral to Sale, saying the bank does not have enough funds to protect it from losses linked to the pandemic, according to one. Barrons report.
Analysts also lowered Wells Fargo’s profit forecast to 47% in 2020 and 18% for 2021. In terms of global banks in the United States, UBS has cut its forecast for 2020 by 25% and 18% in 2021.
“[A] A weak earnings base means headwinds in additional income and expense have a disproportionate percentage point impact on earnings, ”UBS analyst Saul Martinez said of Wells Fargo.
Martinez said the bank cannot fill its balance sheet with more loans due to the Federal Reserve cap imposed on Wells Fargo in the wake of the 2016 fraud scandal. The bank has been given the green light to extend the loans of the paycheck protection program, but cannot retain any of the fees.
Additionally, Martinez said Wells Fargo’s net interest income will decline 6.5% this year. He also criticized the bank for not having an adequate allowance for credit losses under the new framework of the current expected credit losses.
Wells Fargo admitted to analysts on an April call that its loan loss reserves were lower than other FIs, according to the Barrons report.
Martinez said he does not believe most banks have sufficient loan loss reserves given that trade credit quality is expected to collapse. Total losses for commercial and industrial loans were 3.6% to 3.8% in the “nine quarters following the last three recessions.” The banks’ own expectations for C&I losses were 1% to 1.7%.
“Ultimately, however, we believe banks will need to increase their reserves significantly as the scale of C&I losses becomes visible,” Martinez wrote.
In FebruaryWells Fargo has agreed to pay $ 3 billion in settlement with regulators over a scandal involving the creation of fake accounts.