Wells Fargo: Too Big To Succeed?

Nearly a decade after big U.S. banks were deemed “too big to fail” during the financial crisis, banks like Wells Fargo & Co WFC are now bigger than ever. In fact, Berenberg analyst James Chappell now believes Wells Fargo has grown too big to succeed and has downgraded the stock from Hold to Sell.

According to Chappell, the $271 billion Wells Fargo is now so large there is no easy way for the company to differentiate itself from rival banks. As a result, the company may be destined for industry-average ROE of around 10 percent (see Chappell's track record here).

Unfortunately for shareholders, at 1.75 times tangible book value, Wells Fargo is currently priced at a significant premium to its banking peers.

“Due to its size, WFC has been unable to fight industry trends such that its revenue margin and temporary cost advantage have disappeared,” Chappell wrote. Without those advantages in place, he doesn’t see how Wells Fargo will be able to reach management’s lofty goals.

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Chappell also believes that Wells Fargo’s massive size and rapid growth likely contributed to the sales practices issues that tarnished the company’s reputation last year.

While investors have cheered Wells Fargo’s lending growth over the past decade, the company’s loan portfolios demonstrated higher loss rates than peers in the most recent round of stress tests.

Looking ahead, Chappell sees too many headwinds for a bloated Wells Fargo, including weakening credit demand, persistently low interest rates and lower-than-expected non-interest income.

Berenberg expects Wells Fargo EPS is likely headed lower from its current levels and has lowered its price target for the stock to $35.