Moody's Investors Service, a rating arm of Moody's Corporation (MCO - Free Report) , recently affirmed all the ratings of Wells Fargo (WFC - Free Report) and its subsidiaries. The Wall Street biggie’s long-term deposit rating has been affirmed at A2, senior debt rating at Aa2 and subordinated debt rating at Aa3. The bank’s counterparty risk assessments is Aa1(cr)/Prime-1(cr). The bank’s subsidiary has deposit ratings of Aa1/Prime-1 and a stand-alone baseline credit assessment (BCA) of a2.
However, the rating firm’s outlook for the bank has been downgraded to “negative” from “stable”.
Rationale Behind the Downgrade
Following the consent order by the Federal Reserve which puts a cap on increasing assets beyond $1.95 trillion (as of Dec 31, 2017) for Wells Fargo, Moody’s downgraded the bank’s rating outlook to negative from stable.
It has been more than a year since the news of the banking giant’s alleged involvement in unfair sales practices hit headlines. Moreover, the recent move by the Fed has increased reputational headwinds for the bank which might result in more customer attrition impacting financial performance and credit metrics. Therefore, the rating firm downgraded the outlook to negative.
The allegation led to many setbacks involving the bank’s shattered image, numerous lawsuits, triggered federal and state investigations, congressional hearings and the bank’s former CEO — John Stumpf — losing his job. Further, suspension of business relations of the bank with states, including Illinois and California, were noted.
Thus, post scandal, the bank undertook a number of steps to restore its reputation. It initiated an internal probe and hired a consultant to review its sales practices. Additionally, management proposed to eliminate sales goals for its retail banking business earlier than planned.
According to Moody’s, Wells Fargo implemented aggressive sales strategies without proper risk-management practices and governance which resulted in the sales scandal. The rating firm expects the compliance and operational risk-management program of the bank will be improved going forward as required by the Fed. Therefore, future assessments of Moody’s of the bank’s corporate governance will depend upon the effectiveness of the bank in carrying out the initiatives for improvement.
Further, on the Fed’s approval, Wells Fargo will appoint independent third-parties to conduct the review of its processes and submit the results by Sep 30, 2018. The outcome of evaluation of such review by the Fed will decide the removal of recent sanctions on the bank.
Moody’s affirmed Wells Fargo's ratings on expectations of the bank’s strong credit metrics and liquidity position. Despite litigation issues, the company’s asset quality and capital ratios have marked improvement. In addition, profitability metrics are on an upswing, aided by lower tax rate and controlled expenses.
Currently, the banking giant is caught in a horde of litigations over several malpractices which have come into the spotlight. Also, the recent assets cap put on the bank by the Fed has disappointed investors. Therefore, it is going to be a long and expensive journey for Wells Fargo till it gets all the dust settled.
The bank’s year-to-date performance reflects investors’ disappointment. Shares of Wells Fargo have declined 5.6%, underperforming the industry’s gain of 0.5%.
Currently, Wells Fargo carries a Zacks Rank #2 (Buy).
Stocks to Consider
Comerica (CMA - Free Report) has been witnessing upward estimate revisions for the last 60 days. Additionally, the stock has gained nearly 6.9%, year to date. It currently sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
JPMorgan (JPM - Free Report) has been witnessing upward estimate revisions for the last 60 days. Year to date, the company’s share price has been up more than 4.8%. It currently carries a Zacks Rank of 2.
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