Wells Fargo Draws a Rare Downgrade as Wall Street Looks for Next Catalyst

Charlie Scharf, CEO at Wells Fargo. (PATRICK T. FALLON/AFP via Getty Images)

Gains in Wells Fargo stock reflecting the June removal of a longstanding cap on the bank’s size leave little room for the shares to rise in the short run, Raymond James says.

Analysts led by David Long lowered their rating to Market Perform from Strong Buy in a note to clients Monday. The stock dropped 2.4% to $81.66, while the broader market declined. The SPDR S&P Bank ETF fell 1.4% and the S&P 500 fell 1%. Wells hit a record high last week.

The call is notable because Wall Street, increasingly optimistic about the bank’s growth opportunities without the seven-year-old cap on the size of its asset base, is largely encouraging investors to buy the stock.

Regulators imposed the cap, the first of its kind when it took effect in 2018, as punishment for the bank’s widespread fake-accounts scandal, which surfaced in 2016 and led to a management overhaul.

Of the 27 analysts who cover Wells, 18 assign it Buy or Overweight ratings, according to FactSet data. Downgrades have been much less common than upgrades; the number of positive ratings has risen to 67% from 45% in the past year, FactSet numbers show.

“While we remain bullish on Wells Fargo’s growth prospects and continued profitability improvement, we believe upside to its [earnings per share] estimates is now appropriately reflected in its premium valuation,” the analysts wrote.

Wells’ stock is trading at 12.4 times the per-share earnings the analysts expect the bank to generate in 2026, compared with the average of about 11 times among its competitors. JPMorgan Chase is an exception within that group, trading at 14.9 times Wall Street’s estimates for 2026, the analysts noted.

Wells trades at 1.98 times its tangible book value, higher than its competitors’ median of 1.85 times and average of 1.83 times, they added. Raymond James’ prior price target on Wells was $84. The firm doesn’t assign targets to stocks it rates at Market Perform.

The analysts’ call also underscores a shift in the way investors are evaluating the stock. They’re asking: With the asset cap in the past, what is the next catalyst for growth? What does growth look like after years of restricted activity? Analysts are watching for how Wells uses its capital to expand and improve its standing in investment banking and other areas.

Investors are set to hear more about Wells’ strategy when the bank reports second-quarter earnings results next week.

More broadly, Raymond James expects bank investors to start favoring smaller banks after a run-up in large-cap names. Wells, JPMorgan, Bank of America, and Citigroup —the four largest U.S. banks—are all popular long positions and trading near 52-week highs, the analysts noted.

“We believe investor sentiment will continue to shift towards the less expensive regional banks, leaving a lower proportion of new money being allocated towards the four mega-cap banks,” they wrote.

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com