S&P Downgrades Wells Fargo Ratings, Stable Outlook Affirmed

S&P Global Ratings recently downgraded the ratings of Wells Fargo (NYSE:WFC) and its subsidiaries. The Wall Street biggie’s long-term issuer credit rating has been downgraded to ‘A-’ from ‘A’ and short-term issuer credit rating from ‘A-1’ to ‘A-2’. The credit profile has also been changed to ‘a’ from ‘a+’.

However, the rating firm’s outlook for the bank has been affirmed at “stable”.

Rationale Behind the Downgrade

Following the consent order by the Federal Reserve which puts a cap on increasing assets beyond $1.95 trillion (as of Dec 31, 2017) for Wells Fargo due to poor governance and controls, S&P also downgraded the bank’s ratings.

Per the rating agency, the regulatory risk of Wells Fargo seems more than expected, and duration of operational and governance improvement also is likely to take longer time. It has been more than a year since the news of the banking giant’s alleged involvement in unfair sales practices hit headlines. Moreover, the Fed’s latest move has escalated reputational headwinds for the bank which might result in more customer attrition impacting financial performance and credit metrics.

Rating Outlook Affirmation

Affirmation of stable outlook depicts S&P’s expectations of improved compliance and operational risk management of the bank with meeting the provisions of the Fed consent order. Further, the rating agency anticipates the banking giant to receive independent third-parties’ review confirmation of its processes on improvement plan by Sep 30, 2018.

Additionally, competitive position of the bank in core businesses are predicted to be minimally affected due to regulatory growth restrictions, and S&P expects the bank to maintain its earnings growth and stable asset quality over the next two years. Capital equity Tier 1 ratio is also anticipated to be above the company's long-term target of 10%, and the S&P’s risk-adjusted capital ratio is likely to remain at the higher end of the 7-10% range.

Rating Action by Other Firm

Recently, Moody's Investors Service, a rating arm of Moody's Corporation (NYSE:MCO) , affirmed all the ratings of Wells Fargo and its subsidiaries. The bank’s long-term deposit rating has been affirmed at A2, senior debt rating at Aa2 and subordinated debt rating at Aa3. The bank’s counterparty risk assessments is Aa1(cr)/Prime-1(cr). The bank’s subsidiary has deposit ratings of Aa1/Prime-1 and a stand-alone baseline credit assessment (BCA) of a2.

However, the rating firm’s outlook for the bank has been downgraded to “negative” from “stable”.

Conclusion

Currently, the banking giant is caught in a horde of litigations over several malpractices which have come into the spotlight. Also, the recent assets cap put on the bank by the Fed has disappointed investors. Therefore, it is going to be a long and expensive journey for Wells Fargo till it gets all the dust settled.

The bank’s year-to-date performance reflects investors’ disappointment. Shares of Wells Fargo have declined 5.2%, underperforming the industry’s gain of 2.3%.

Currently, Wells Fargo carries a Zacks Rank #2 (Buy).

Stocks to Consider

Comerica (NYSE:CMA) has been witnessing upward estimate revisions for the last 60 days. Additionally, the stock has gained nearly 7.8%, year to date. It currently sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

JPMorgan (NYSE:JPM) has been witnessing upward estimate revisions for the last 60 days. Year to date, the company’s share price has been up more than 5.6%. It currently carries a Zacks Rank of 2.

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