While Wall Street Remains Calm, One Analyst Says 'Sell' Wells Fargo (WFC) Amid Widespread Customer Abuse

September 9, 2016 1:03 PM EDT
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Price: $46.41 +0.56%

Rating Summary:
    15 Buy, 16 Hold, 7 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 25 | Down: 28 | New: 8
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Shares of Wells Fargo (NYSE: WFC) are relatively stable (-1%) Friday, one day after being fined $185 million by the Consumer Financial Protection Bureau and other government agencies for the widespread illegal practice of secretly opening more than 2 million unauthorized deposit and credit card accounts. The company fired 5,300 employees related to the scheme and has launched a marketing blitz to avoid widespread damage to its reputation.

Most on Wall Street shrugged at the news - another day another financial firm fine, they thought - but one controversial banking analyst has sounded the alarm amid the news and is recommending clients sell the stock.

The analyst making the call is Dick Bove of Rafferty Capital and he claims this is a "very big" problem for Wells. The analyst cut his rating from Hold to Sell and his price target from $51 to $44.

"This is very unsettling because even though the fines are not meaningful the damage to the Wells business model is significant," he claims. "Plus, this case re-opens the issue as to whether consumers can trust their banks and, therefore, whether more regulation is needed."

Bove provided some personal anecdotal evidence to describe what may have happened at the bank. He notes he was a client of legacy Wachovia Bank for years when Wells acquired the troubled institution. He noted a number of significant negative changes after Wells took over. Specifically, he commented:

"They rostrum was eliminated. Every Wachovia employee but one was removed. No one greeted customers coming in the door. The open space in the lobby was populated with desks and sales people who were constantly on the telephone calling for new business. Ultimately the branch manager was changed and not replaced. An assistant manager was running the branch. If I had problems to solve I was told no one in the branch could help, I would have to call the bank’s online services. These calls were handled in a very professional and pleasant manner."

In short, he said, Wells had converted an 'old-time' bank branch into a efficient sales and marketing organization. An "intense sales culture" was put in place, he notes. The pressure was so intense and so pervasive that when a new customer came into the bank the account executive would open three accounts for that customer not just one and that the customer never knew what was happening, Bove said it was relayed to him.

He sees two continuing issues now at Wells, which is why is is telling clients to avoid the stock.

First, internally significant changes are necessary. The sales model must be adjusted to reduce pressure on associates who might be tempted to cheat to save their jobs and obtain big bonuses, he said.

Second, is externally. Bove notes while there has been tremendous pressure put on the banking industry in the past 8 years by the politicians and the press, the public has voted with its money to increase its commitment to the banks. The public did this because it trusted these institutions. Wells just raised issues as to whether this trust was valid, he commented.

"Wells may have hurt every bank in the United States by what it has done," he commented. "It may have put more fire in the bellies of those who want to more strictly regulate the industry. One can only wait and see but breaking faith with customers is simply unacceptable for any company in any business and this is the biggest issue facing Wells Fargo today."

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