Morgan Stanley on Tuesday downgraded the top performing large-cap bank stock in 2021, Wells Fargo, citing persistent regulatory challenges. Wells Fargo is up 57.6% this year, compared with the S & P 500's 18.3% gain. JPMorgan Chase is up 31% and Bank of America has rallied more than 42% this year. "At these levels, we see a more balanced risk-reward skew, with less upside in the Base and Bull Cases," Morgan Stanley's Betsy Graseck said in a note. Morgan Stanley demoted Wells Fargo to an equal weight rating from overweight. The firm also cut its price target on the stock to $46 from $49. The new projection implies 3.3% downside from Monday's closing price. The Federal Reserve in 2018 put an asset cap on Wells Fargo of $1.95 trillion after the bank's fake account scandal in which it created millions of bank accounts in real people's names without their knowledge or consent. Fed Chair Jerome Powell said last week the asset cap "will stay in place until the firm has comprehensively fixed its problems." Morgan Stanley's note said: "We are interpreting these comments to mean Wells must materially reduce its number of consent orders outstanding to have the asset cap lifted. If that's the prerequisite, it will take a lot of time to do as the consent orders are issued by different regulators, and each of the 10 consent orders has the potential to be a multiyear process." Morgan Stanley anticipates Wells Fargo's expenses will jump as the bank's management aims to resolve its regulatory problems. "Getting out of the consent orders, and ultimately the Fed asset cap, is the number one priority of Wells Fargo's new C-Suite and new business heads. That's a risk to expenses, as we think Wells will be willing to spend more money on getting out of consent orders than less," the analysts said. Morgan Stanley did not take Wells Fargo to underweight as it anticipates interest rates rebounding when the Fed tapers its pandemic-era easy money policy. Higher rates mean banks charge greater interest on loans, which typically boosts profits. The analysts also believe Wells Fargo management could roll out expense reduction initiatives in 2022 that could lead to lower costs than expected. —CNBC's Michael Bloom contributed reporting.
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Morgan Stanley on Tuesday downgraded the top performing large-cap bank stock in 2021, Wells Fargo, citing persistent regulatory challenges.