Wells Fargo & Co.’s surprise announcement that Chief Executive Tim Sloan was leaving prompted both long-time bulls and bears to back away from their calls, and led to a selloff in the bank’s stock.
Although analysts viewed the retirement as positive in terms of addressing regulatory issues, there was uncertainty on what it meant for the longer-term fundamental outlook.
The bank’s shares WFC, -1.57% dropped 2% in active afternoon trade, helping cap the gains in the financial sector. Volume spiked to nearly 43 million shares, compared with the full-day average of about 19.3 million shares.
The stock was the biggest decliner in the SPDR Financial Select Sector exchange-traded fund XLF, +0.27% which was up 0.1% although 52 of 68 equity components gained ground. In comparison, the S&P 500 index SPX, +0.67% rose 0.5%. See Market Snapshot.
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Analyst Matt O’Connor at Deutsche Bank downgraded Wells Fargo to hold, after being at buy since at least September 2016. He trimmed his stock price target to $54, which is 12% above current levels, from $56.
The good news: “A new CEO should help speed up the process of addressing regulatory issues, in our view,” O’Connor wrote in a note to clients. He said it’s also possible a new CEO could find new ways to cut costs, and uncover some revenue opportunities.
Regulatory issues gripping Wells Fargo include the unprecedented Federal Reserve ban on growing assets, as well as increasing pushback from the Office of the Comptroller of the Currency.
See related: The sanctions against Wells Fargo are so unusual, no one knows what to think.
The bad news: As a new CEO re-evaluates cost-savings targets, O’Connor is concerned “the timing may be pushed out.” In addition, a new CEO could make changes to the business model, by exiting or reducing some areas, which could lead to lower revenue and earnings.
Also, “near-term revenue may suffer from uncertainty surrounding new leadership and potential changes, in our view,” O’Connor wrote.
Sloan was a long-time Wells Fargo executive, who was promoted to CEO in 2016 to replace then-CEO John Stumpf, who stepped down in the wake of a sales-practice scandal in which millions of fake accounts were created to meet quotas.
Meanwhile, Raymond James analyst David Long upgraded Wells to market perform, after being at underperform since at least April 2016.
He said the criticism Sloan received during his testimony before the House Financial Services Committee earlier this month, and the calls for his dismissal, may have interfered with the bank’s recovery efforts.
“We believe the move is a positive step, which will improve investor sentiment and reduce regulatory scrutiny, as the bank searches outside the company for a successor,” Long wrote in a research note.
That’s not enough to make Long bullish, however, as he said any enthusiasm over the CEO move is tempered by “still inferior fundamental performance,” as revenue is expected to decline again this year, earnings estimates are expected to be lowered and profitability metrics are still below the bank’s peer group.
“Furthermore, as the bank was on a path to improve profitability, a new CEO could delay such improvement as he/she implements his/her own initiatives,” Long wrote.
Long said “unrelated to Sloan’s retirement,” he was cutting hits 2019 earnings-per-share estimate to $4.84 from $4.90, and his 2020 EPS estimate to $5.38 from $5.45. Those compare with the FactSet consensus for 2019 EPS of $4.93 and for 2020 EPS of $5.64.