Wells Fargo Stock: Legacy Issues Continue to Haunt

The damaging fraudulent sales practices scandal continues to haunt Wells Fargo (WFC) even today. 

Notably, its stock came under pressure on Tuesday, closing 5.6% lower as Bloomberg reported that the OCC (Office of the Comptroller of the Currency) and CFPB (Consumer Financial Protection Bureau) aren’t happy with the speed at which the bank is compensating victims and strengthening its risk controls. (See Wells Fargo stock charts on TipRanks)

Citing people familiar with the matter, the Bloomberg report stated that the OCC and CFPB have warned Wells Fargo and could impose sanctions. 

It’s worth noticing that Wells Fargo coughed up billions in penalties to resolve the investigations related to its community bank sales practices. Last year, Wells Fargo reached a $3 billion settlement with the DOJ (Department of Justice) and SEC (Securities and Exchange Commission) to resolve criminal and civil investigations. 

For those who do not know, Wells Fargo’s aggressive cross-selling strategy and relentless pressure to market and sell multiple products led employees to engage in fraudulent sales practices to meet their targets.

The bank admitted in 2017 that about 3.5 million phony accounts were opened without customer consent. Wells Fargo’s then-CEO, Tim Sloan, tendered an apology to customers impacted by the bank’s unacceptable sales practices.  

Earlier this year, Wells Fargo’s current CEO, Charlie Scharf, said during the Q4 conference call that the “required work to put our substantial legacy issues behind us” continued to impact the bank’s results. 

While providing the 2021 expense outlook, Wells Fargo’s CFO Mike Santomassimo stated, “While we made significant progress on working through our legacy issues, we still have significant outstanding litigation and regulatory issues that can be unpredictable.”

Nevertheless, the bank is investing in its risk and control measures to remediate its legacy issues. Further, its recent quarterly performance impressed. I have a bullish outlook on Wells Fargo stock, as improving operating environment, reserve releases, and improved credit quality could cushion its bottom line. 

In response to its quarterly performance, Chris Kotowski of Oppenheimer said that he expects Wells Fargo to benefit from the recovery in loan growth and rise in interest rates. However, he added that “we would give WFC time to work through its outstanding issues.” 

Kotowski maintains a Hold rating on Wells Fargo stock. 

Overall, Wells Fargo commands a Moderate Buy consensus rating, based on 5 Buys and 6 Holds. The average Wells Fargo price target of $51.67 implies 13.1% upside potential to current levels.

Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.

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