Wells Fargo could lag peers amid scandal recovery
The outlook for banks may be improving, but Wells Fargo (WFC) could lag behind its peers.
The San Francisco-based bank on Friday reported fourth-quarter financial results that missed Wall Street analysts' forecasts for earnings per share and revenue as Wells Fargo provided a more detailed look at the aftermath of the scandal over millions of accounts opened without customer authorization.
Revenue was flat, and net income fell 5.4% compared with last year's fourth quarter. In December, new checking accounts sank 40% and new credit card applications dropped 43% in comparison with 2015.
The news wasn't all bad. The bank reported early signs that the decline in new checking accounts and credit card applications may be easing, or even turning around. Total average loans and total average deposits were both up 6%. The number of primary consumer checking customers rose 3.5% year-over-year. Net interest income also increased.
The mixed results encouraged Wells Fargo CEO Tim Sloan, who got the top job with predecessor John Stumpf's abrupt October retirement after the scandal cost the bank $185 million in penalties and threatened an estimated $1.7 billion in litigation costs.
"We're just excited that we saw what seems to be an inflection point in the midst of the fourth quarter. And so we're starting to see some real positive attributes in some of those metrics, not only in terms of account activity but also in terms of customer service and experience," Sloan told financial analysts during a Friday conference call.
Moving forward from the scandal, the bank is complying with regulators' orders for new internal safeguards, overhauled the incentive compensation plan to pressured bank employees to open the unauthorized accounts and hiked minimum pay rates for roughly 26,000 lower-level workers.
But those moves, combined with the positive metrics, weren't enough to prevent CFRA equity analyst Cathy Seifert from downgrading her recommendation on Wells Fargo shares to "hold" from "buy" on Friday.
"We note WFC is seeing a revenue hit from its sales practices scandal,” Seifert wrote in a research report. "While it is taking numerous steps to overcome this issue, we think near-term results may lag peers, removing a catalyst from the shares.”
In a subsequent phone interview, Seifert added that other major U.S. banks — with larger trading operations and ability to profit from higher interest rates — could be better poised to benefit from "a rising (U.S. interest) rate environment. She predicted that other big banks generally would outperform the broader market over the next 12 months, while Wells Fargo's results would be in line with market performance.
Follow Paste BN reporter Kevin McCoy on Twitter: @kmccoynyc