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Wells Fargo Cut to Equal Weight; Morgan Stanley Eyes Valuation

Morgan Stanley downgraded Wells Fargo on valuation concern and regulatory issues.

Wells Fargo  (WFC) - Get Wells Fargo & Company Report was downgraded to equal weight from overweight by Morgan Stanley amid valuation concern and the bank’s continuing regulatory issues.

Morgan Stanley trimmed its share-price target to $46 from $49.

The stock has soared 58% year to date, making it the biggest gainer among large-capitalization bank stocks.

“At these levels, we see a more balanced risk-reward skew, with less upside in the base and bull cases,” Morgan Stanley analyst Betsy Graseck wrote in a commentary cited by CNBC.

As for regulatory issues, pn Monday, Wells Fargo agreed to pay $37 million to settle claims that it overcharged more than 700 commercial customers that used its foreign exchange services.

And last week, Fed Chairman Jerome Powell said the asset cap placed on Wells Fargo three years ago “will stay in place until the firm has comprehensively fixed its problems,” CNBC reported.

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“We are interpreting these comments to mean Wells must materially reduce its number of consent orders outstanding to have the asset cap lifted,” Graseck said.

“If that’s the prerequisite, it will take a lot of time to do, as the consent orders are issued by different regulators, and each of the 10 consent orders has the potential to be a multiyear process.”

J.P. Morgan's take: "In our view, the timing of lifting of the asset cap is likely to be much more impacted by the new consent order added earlier this month, Sen. [Elizabeth] Warren’s probes, and Gov. Powell’s comments about expectations," it said.

J.P. Morgan has a neutral rating on Wells.

Morningstar analyst Eric Compton puts fair value for Wells at $55. “We have long highlighted the time-horizon risk,” he wrote last month.

Wells Fargo shares recently traded down 3.3% near $46.