By Steve Gelsi
Odeon Capital cuts Wells Fargo to hold from buy on ‘margin problem,’ while Morgan Stanley gets downgraded to market perform by KBW on wealth-management transition
Wells Fargo & Co. and Morgan Stanley have picked up separate downgrades as analysts sift through fourth-quarter earning updates in the face of headwinds tied to the cost of deposits and retooling at the two big banks.
Odeon Capital on Thursday downgraded Wells Fargo & Co.’s stock (WFC) to hold from buy as the bank faces challenges posed by a lack of growth in loans and difficulty attracting deposits, analyst Dick Bove said in a research note.
“This is a ‘wait until next year’ story,” Bove said. “The bank is well-managed and taking the right steps to position itself for the intermediate and longer term.”
Wells Fargo’s stock was down by 0.2% in premarket trading on Thursday. It reported higher fourth-quarter profit last Friday. The stock has risen 8.7% in the past year, while the S&P 500 SPX is up by 20.6%.
Also read: Wells Fargo set aside a lot more money for potential loan losses, stock falls
Wells Fargo is in the midst of restructuring to focus more on less “labor-intensive” businesses such as capital-markets activity and credit cards, rather than home and car loans as well as business loans, Bove said.
It’s also facing the cost challenge of paying higher interest rates on products such as certificates of deposit, Bove said.
Wells Fargo has also reported a 4.2% drop in car loans, while credit-card activity is up by 5.7%, Bove said, citing the bank’s fourth-quarter results.
The bank also said its non-interest-bearing deposits dropped by 6.3%, while interest-bearing deposits increased by 2.9%, Bove said.
“With loans not growing and deposits hard to attract, the bank is dealing with significant challenges,” Bove said. “The margin problem created in recent quarters is significant, and unlikely to be eliminated for some time until CD rates come down.”
KBW cuts Morgan Stanley to market perform
KBW on Tuesday downgraded Morgan Stanley (MS) to market perform from outperform and cut its target price for the bank’s stock to $91 from $102.
Also read: Morgan Stanley posts big revenue beat with boost from fixed-income underwriting, but its stock still falls
Analyst David Konrad said Morgan Stanley has “limited near-term catalysts” as its wealth-management unit faces a transition period.
Liquidity is coming out of deposits into fixed-income products, which in turn is causing profitability to drop until investors rotate back into equities, he said.
The bank’s outlook on its wealth-management profit margins has fallen to the mid-20% range over the near term, with the expectation of returning to 30% over time.
“We assume that [Morgan Stanley] can hit that goal … but discounting it back leaves less upside currently,” Konrad said.
While Morgan Stanley turned in a solid quarter and better-than-expected revenue excluding hedging losses, the bank’s wealth-management business remains in transition.
Morgan Stanley’s stock was up by 0.3% in premarket trading on Thursday. The stock has dropped 10.3% in the past year, while the S&P 500 has risen by 20.6%
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