Wells Fargo Lags Other Banks After Ratings Downgrade

(Bloomberg) -- Wells Fargo & Co. lagged peers in Tuesday trading after Atlantic Equities cut its rating on the stock to underweight from neutral, saying in a note that the bank will probably deliver net interest income at the bottom of its forecast range as the outlook for interest rates has deteriorated since it reported first-quarter results.

Lower Treasury yields and tougher deposit competition mean that pressure on net interest margin, or NIM, “is clearly intensifying,” Atlantic analyst John Heagerty wrote. That means Wells Fargo is likely to show net interest income at the low end of its April 12 view of a drop of 2% to 5%, even as consensus estimates call for a beat, he said.

The search for a new CEO is also adding to uncertainty about 2020 expenses, with “an external appointment likely to implement a modified strategy which could postpone Well Fargo’s recovery to 2021,” he wrote. On Tuesday, the Wall Street Journal said that several people have turned down an offer to head the bank, citing unidentified people familiar with the matter.

Heagerty also warned that revenue growth may disappoint as the bank is focused on regulatory compliance and cutting costs. He believes that “consensus remains too optimistic,” and the bank will underperform peers over the next 12 to 18 months.

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Wells Fargo is lagging other bank stocks so far this year, with a gain of just 0.7% versus a 14% rally for the KBW Bank Index, and a 16% gain for the S&P 500. Citigroup Inc. is the top bank index performer, jumping 30%.

Wells Fargo is due to present at the Morgan Stanley Financials Conference in New York on Wednesday at 8:45 a.m. Companies including Morgan Stanley, Citigroup Inc. and Mastercard are due to present on Tuesday, which is the conference’s first day. Deutsche Bank has warned that bank executives at the event may sound more cautious about loan growth and consumer sentiment and may point to worsening net interest margins.

Read more: Banks May Get More Cautious as Trade Stings, Deutsche Bank Says

Wells Fargo shares were earlier down as much as 1.1% in early Tuesday trading, while the KBW Bank Index rose as much as 1.5%. Wells Fargo saw the smallest gain in the bank index Tuesday, when 23 of 24 banks advanced, led by by All index members, except for Wells Fargo, were gaining, led by Regions Financial Corp., Comerica Inc. and Huntington Bancshares Inc.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

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