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Wells Fargo stock contrarians: Why some analysts still say 'buy'

After more than three years of scandals and fallout at Wells Fargo & Co., a little improvement will go a long way. So says the small group of analysts who still recommend buying the stock.

A flurry of downgrades in recent months pushed analysts' outlook on the San Francisco-based firm to its worst since the financial crisis. Still, as new Chief Executive Officer Charlie Scharf conducts a strategic review and works through the bank's myriad regulatory issues, some see reason to be bullish.

Just six of the 31 analysts tracked by Bloomberg have a buy rating or its equivalent, making it the least popular bullish bet of the largest U.S. banks. Since September 2016, the firm has been reeling from scandals that led to the exits of two CEOs and kept the stock relatively flat while the broader KBW Bank Index gained about 50%.

"It's not a turnaround story overnight," said Kyle Sanders, an analyst at Edward Jones who has suggested buying the stock for more than a year. "You've got to be a little bit early if you want to catch the rebound, and that's the bull case."

Wells Fargo has reported muted results for years as fallout from a series of scandals across the firm drove up legal costs and hampered growth. In recent quarters, the hit to earnings has been compounded by falling interest rates.

The bulls argue this has masked what is still a powerful profit engine amid strong consumer credit quality and a sustained economic expansion. That can shine through as legal costs eventually dip and Scharf finds more expense savings in other areas.

"The opportunity to improve results is quite easy and will be really powerful for them," Sanders said. "It's very easy to see them trim a lot of fat around the company. They're really inefficient compared to their peers."

Renaissance Macro Research analyst Howard Mason agreed, arguing that the bank's results are due to improve, following rivals that have set profit records in the past two years, thanks in part to lower tax rates.

"It's a very strong community bank with a wonderful distribution network," Mason said. "I would make the case that earnings are meaningfully below normal because of this very inflated efficiency ratio, and that is going to come down."

The fallout from years of problems at Wells Fargo has dragged into 2020. Former leaders including ex-CEO John Stumpf were hit with civil charges, and Scharf has warned investors that the bank still has a long way to go.

Wells Fargo set aside more than $1 billion for litigation in the fourth quarter, bringing the total for the second half of last year to more than $3 billion. The bank has yet to settle with the Department of Justice and the Securities and Exchange Commission over its fake-accounts scandal, and it faces an array of other open probes and sanctions including a Federal Reserve-ordered growth cap.

"It's a lot of stuff you already knew," said Morningstar analyst Eric Compton, who upgraded the stock from hold to buy last month. "Scharf just started, so it's going to take him some time to turn this around."

Published : February 20, 2020

By : Syndication Washington Post, Bloomberg · Hannah Levitt · BUSINESS, US-GLOBAL-MARKETS