Deutsche Bank Lays Out The Bull And Bear Scenarios For Wells Fargo

Wells Fargo & Co (NYSE: WFC) shares have declined 8 percent, underperforming the BKX by 670 bps, following the details of the company’s “sales tactics” being revealed.

Deutsche Bank’s Matt O'Connor maintains a Buy rating on the company, while lowering the price target from $59 to $50.

O'Connor discussed the bull and bear arguments on the stock, while mentioning that any meaningful upside on the stock was unlikely in the near term.

The Bear Case

The analyst believes the underperformance of Wells Fargo’s stock appears relatively modest, especially against the backdrop of the headline risks and that cross-selling has been a core part of the company’s strategy.

Related Link: Goldman Continues To Be A Buyer Of Wells Fargo Despite Recent Scrutiny, Sees 22% Upside

“Additional legal/regulatory risks remain & could be meaningful for 1–2 qtrs & potentially reduce share buybacks,” O'Connor stated, while pointing out that there could be a need for higher regulatory and compliance spend, lesser buyback and a modest decline in revenue.

However, the analyst also noted that Wells Fargo has been “among the most successful in navigating the tough regulatory and legal environment post crisis. This could have a longer term effect on valuation.”

The Bull Case

O'Conner also pointed out that the “bad news” was unlikely to have any lasting impact on the stock valuation, and that there have been instances when following a crisis, the market was surprised by a significant event.

Following the pullback, the analyst views the stock valuation as attractive, given that Wells Fargo is now trading at a 13 percent discount to its high return peers.

In addition, O'Connor noted, “EPS trends have been and are likely to remain sluggish. However, this is an issue for the overall industry as we expect just 4 percent growth for large regionals in 2017 and even less for high return peers.”

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