Wells Fargo shares are tanking as Wall Street is stunned over the Fed’s ‘harsh’ action; multiple firms downgrade bank

  • Analysts predict the Fed's enforcement action against Wells Fargo will hurt the bank's earnings.
  • "Investors will have difficulty determining when the C&D [cease and desist] will be lifted, resulting in an ongoing 'cloud' over the stock price and earnings," RBC Capital Markets says.
  • At least five Wall Street investment banks downgrade WFC shares following the news.

Analysts are bailing on their bullish calls for Wells Fargo shares because they believe the Federal Reserve's surprising enforcement action will hurt the bank's financial results and hang over the stock for most of 2018.

The Federal Reserve said Friday it is restricting Wells Fargo's size in response to "widespread consumer abuses." The government is prohibiting the bank from growing any larger than its total assets as of the end of 2017 until "sufficient improvements" are made.

Wells Fargo shares declined 9.2 percent Monday. At least five Wall Street investment banks downgraded the shares following the news.

RBC Capital Markets reduced its rating to underperform from outperform, predicting the restrictions will detract from investor sentiment.

"We were surprised by the C&D [cease and desist] considering the amount of money, time and effort the company has already put into remedying the sales practice issues that were disclosed in late 2016," analyst Gerard Cassidy wrote Monday. "Investors will have difficulty determining when the C&D will be lifted, resulting in an ongoing 'cloud' over the stock price and earnings."

Cassidy cut his price target for Wells Fargo shares to $50 from $65, representing 22 percent downside from Friday's close.

Other Wall Street firms focused on the financial impact from the Fed's asset growth limitations for the bank.

Keefe, Bruyette & Woods lowered its rating to market perform from outperform, saying the Fed's action will hurt the bank's earnings.

"The major takeaway is that we believe WFC will have to be defensive until the C&D is lifted, and that is negative relative to our previous earnings forecast, which reflected the company being offensive," analyst Brian Kleinhanzl wrote in a note to clients Sunday. "We would look to get more constructive when earnings visibility improves, but we expect that to be a year away at the earliest."

Kleinhanzl reduced his price target for Wells Fargo shares to $63 from $70, representing 2 percent downside to Friday's close.

J.P. Morgan lowered its rating to underweight from neutral, citing the unprecedented nature of the Fed's action.

"The harsh Fed consent order is rare and a strong sign of regulators' frustration about the very wide swath of areas where Wells has had issues (e.g., consumer deposits, consumer lending, small business banking, merchant acquiring)," analyst Vivek Juneja wrote in a note to clients Monday.

Morgan Stanley also downgraded Wells Fargo to an underweight rating from overweight Monday.

Wells Fargo did not immediately respond to a request for comment.

— CNBC's Michael Bloom contributed to this story.