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Fitch Cuts Wells Fargo's Outlook to Negative, Affirms Rating

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Wells Fargo & Company’s (WFC - Free Report) credit outlook has been cut from ‘Stable’ to ‘Negative’ by Fitch Ratings Inc. The rating agency stated that the cut highlights the potential damage to the bank’s reputation and earnings profile owing to recent regulatory actions and fines.

However, the agency affirmed this San Francisco-based bank’s investment grade rating at AA-. This primarily reflects the company's robust earnings profile and liquidity.

Reasons behind the Outlook Cut

Wells Fargo has been facing troubles since the sales scandal surfaced in September. Authorities, including the Consumer Financial Protection Bureau as well as other California and federal regulators, have charged a combined fine of $190 million to the bank. This was further followed by two congressional hearings and several other investigations, where Wells Fargo’s Chairman and CEO – John Stumpf – apologized for the unethical sales.

Likely Consequences

Fitch and other rating agencies, like Moody’s, mentioned that the scandal could lead to a ‘credit negative’ for the bank. However, any agencies other than Fitch did not change their rating or outlook.

Fitch’s outlook will have the most significant credit rating impact. Despite the present strength in the bank’s earnings, the rating agency believes that the scandal might dent the company’s bottom line going forward.

Further, it believes that damage to the bank’s reputation, impact on its selling practices, risk oversight failures and the resulting effect on earnings are much bigger concerns than the actual fine imposed.

Wells Fargo’s stock has declined around 10% on NYSE since the scandal came into news. The stock currently carries a Zacks Rank #4 (Sell).

Farmers Capital Bank Corporation (FFKT - Free Report) is a better-ranked stock in the same space. Earnings estimates for this Zacks Rank #1 (Strong Buy) stock has been revised 1% upward to $2.17 per share for 2016 over the past 30 days.

Other favorably placed stocks include JPMorgan Chase & Co. (JPM - Free Report) and State Street Corporation (STT - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for JPMorgan Chase has risen from $5.61 per share to $5.62 per share, over the past 30 days for 2016. For State Street Corporation, the upward revision was from $5.02 per share to $5.04 per share for the current year.

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