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Wells Fargo's reputation has taken a major hit on Main Street, and now Wall Street is jumping on the bandwagon.
Analysts have been ganging up on an institution that not so long ago had arguably the most pristine reputation of all the big banks in the U.S. Revelations that the bank for years had duped millions of customers into taking out products they didn't want or didn't know they were getting has sullied Wells Fargo and led for calls from Congress that officials be prosecuted criminally.
Ultimately, though, the actual price tag for Wells Fargo's transgressions is small, at least compared to the damage done by its counterparts during the 2008 financial crisis and other similar missteps. Due to its aversion to risk-taking and the high-flying Wall Street atmosphere that led to the crisis, Wells Fargo avoided the damaging fallout and need for government bailouts.
So why all the vitriol over a scandal that cost the bank fines of just $185 million, a total that practically amounts to a rounding error on an expected $5.5 billion quarterly profit?
Fitch analyst Julie Solar summed up the situation in one clear sentence:
While (Wells Fargo) emerged from the financial crisis in a much better position than similarly sized peers, Fitch believes this issue creates reputational risk given the issue and allegations are understandable to the general public, in a way that misdeeds at other banks are not.
It's easier to grasp someone selling you a credit card you didn't want than it is trying to grasp the complex world of financial derivatives that led to the 2008 crisis or other bank controversies — JPMorgan Chase's "London Whale," for instance, or the capital concerns that are bedeviling Deutsche Bank.
Solar has joined several other analysts recently in issuing warnings about Wells Fargo's standing, most citing not balance sheet issues but rather "reputational risk" from the illegal sales scandal.
Fitch cut its outlook for the bank from stable to negative, though it said Wells Fargo still has a "superior earnings profile, strong liquidity and still benign asset quality." The agency said Wells Fargo's top credit rating is unchanged.
"Fitch views the ensuing reputational damage, risk oversight failures, impact to its selling practices and the resulting effect on earnings as much larger issues than the actual fine," Solar wrote.
Despite the downgrade, Wells shares were up more than 2 percent in Wednesday afternoon trading. The stock has tumbled 11.5 percent over the past month and is down nearly 18 percent in 2016, badly trailing its competitors. Bank officials did not respond to a request for comment.
Earnings season could be a further disappointment for shareholders.
Financial services firm Keefe, Bruyette & Woods reduced its profit expectations for Wells Fargo from $1.05 to $1 for the third quarter, from $4 to $3.92 for the full year, from $4.20 to $4.05 for 2017 and from $4.65 to $4.55 for 2018.
"We are not expecting much clarity from WFC management about the potential fallout but we have incorporated some negative impacts in our forward estimates," KBW analysts Brian Kleinhanzl and Michael Brown said in a note.
Elsewhere, Goldman Sachs has cut its estimate for the third quarter from $1.03 to $1.01, still above Wall Street consensus but reflecting concern over "increased compliance costs."
And Raymond James analyst David Long said he is reducing his rating on Wells Fargo shares to underperform and cutting earnings estimates as well. Long expects Wells Fargo to report full-year earnings in 2016 of $4 a share, down 2 cents, and $3.94 in 2017, an 18-cent reduction "to reflect heightened expenses associated with regulatory inquiries and investigations."
Long said Wells Fargo faces several issues, including class-action shareholder lawsuits, a U.S. Labor Department review, and moves by California and Illinois to suspend doing business with the bank.
"In the wake of its sales practice scandal, Wells Fargo's venerable status is tarnished," he said. "We believe these developments are material to Wells Fargo's financial performance and expect additional fallout for the bank."