The investment bank cut its rating on Wells Fargo's shares from market perform to underperform. Analyst David Long says that scandals have created a "stigma" around the banking giant -- and that the reputational damage will continue to weigh on Wells Fargo's financial results in the years ahead.
Wells Fargo was busted for creating millions of non-customer-approved accounts back in 2016. The scandal cost the bank hundreds of millions in fines and a sizable number of customer accounts. Thousands of employees also left the firm, many of whom were either fired or chose to leave of their own accord after news of the violations broke.
Wells Fargo has been trying to right its ship and repair the damage to its reputation. The bank brought on a new CEO in October who has a reputation as a turnaround strategist. It also launched a new marketing campaign earlier this year geared toward earning back its customers' trust. These moves, however, are unlikely to be enough to prevent Wells Fargo from continuing to lose share to its rivals.
"Stigma around Wells' account scandal still lingers, as anecdotal evidence suggests the bank continues to lose customers and revenue-producing bankers, and struggles to recruit quality talent," Long said.
Moreover, Long expects this to remain the case in the quarters ahead. "Stigma around Wells Fargo's reputation will likely continue in the near future and remain a headwind for the bank's operational performance," Long said.
Long expects these challenges to result in Wells Fargo's revenue falling nearly 7% in 2020, which would mark the bank's fourth straight year of declines. Long also cut his earnings-per-share projections for 2020 and 2021. He believes lower sales, combined with contracting net interest margins caused by historically low interest rates, will cause the bank's profitability metrics to weaken in the coming years.
As such, Long expects other Wall Street analysts to also reduce their earnings-per-share estimates for Wells Fargo, which he believes will weigh on the bank's stock price. "With another reduction to our EPS estimates, placing us 4.2% below consensus for 2020 and 6.7% below consensus for 2021, we believe negative EPS revisions will provide a headwind for Wells Fargo's shares," Long said.