Sell-Side: Wells Fargo's New CEO A Good Hire, But Don't Look For A Quick Fix

Wells Fargo & Co WFC’s new CEO should bring some needed stability as the bank tries to get out from under regulatory restrictions, but a return to growth won’t happen overnight, sell-side analysts said from the sidelines Monday. 

The bank announced Friday that Charlie Scharf, previously the chairman and CEO of Bank of New York Mellon Corp BK, will start at Wells Fargo Oct. 21, which pushed the bank’s stock up about 4% heading into the weekend.

Since a 2016 scandal over the opening of unauthorized accounts, Wells Fargo has been under regulatory scrutiny and has operated under a consent decree with the Federal Reserve since 2018, requiring it to fix management and governance problems before being allowed to grow its balance sheet.

The Analysts

Morgan Stanley’s Betsy Graseck maintained an Equal-weight rating on Wells Fargo with a $50 price target.

Bank of America Merrill Lynch analyst Erika Najarian reiterated a Neutral rating and $50 price target on the stock.

Baird Research analyst David George downgraded Wells Fargo from Outperform to Neutral and lowered the target price from $52 to $50.

Buckingham Research Group’s James Mitchell reiterated a Neutral rating and $47 target price. 

The Takeaways

The bottom line for analysts is that investors may have unrealistic expectations for how quickly Scharf can satisfy regulators that Wells Fargo has fixed all its problems.

While Baird’s George likes the Scharf hire, and thinks he’ll lead the company past the consent order, it’s “hard to turn a stagecoach on a dime,” he said, with a nod to Wells Fargo’s origins as a 19th century express courier service for west coast gold miners and pioneers.

The bank's headwinds now also include potentially lower interest rates, and the near-term consensus estimates look high to Baird, he said.

BofA’s Najarian agreed the hire looks good, but results won’t come overnight.

“Mr. Scharf did acknowledge that cleaning up the regulatory issues he inherited will remain his top priority,” the analyst said in a Monday note.

"While today’s announcement may provide a higher floor for the stock over the near-term, we see a long journey ahead."

Morgan Stanley’s Graseck expects the company could exit the consent decree around the fourth quarter of 2020, but said that’s not completely certain.

“We remain on the sidelines until there is more clarity on when the Fed-imposed asset cap and consent order can be lifted,” she said. 

A new CEO could potentially get Wells Fargo's asset cap removed more quickly, said Buckingham's Mitchell — although the bank has been operating well under the asset cap and is unable to drive net growth as it repositions and simplifies its business operations. 

“Combined with the challenging interest rate environment, we don't see WFC returning to Y/Y revenue growth until 4Q 2020 at best.”

Price Action

Wells Fargo shares were down 0.34% at $50.54 at the time of publication. 

Related Links:

Wells Fargo Names Banking Veteran Charles Scharf As President, CEO

Wells Fargo CEO Tim Sloan: Bank's Culture Has 'Substantially Improved'