Wells Fargo, a stock beloved by Warren Buffett (Trades, Portfolio), became his only holding besides Sanofi (SNY, Financial) to fall to its 52-week low price Wednesday after it reported fraud involving fake accounts in its commercial banking. Rare pricing windows on Buffett stocks usually drawn investors, but the impact of the scam at Wells Fargo may obscure Wells Fargo's attractiveness.
According to the Consumer Financial Protection Bureau, Wells Fargo illegally opened more than 2 million unauthorized deposits and credit card accounts, spurred by sales targets and compensation incentives. The bureau has already slapped a $185 million fine, its highest ever, on the bank.
Shares of Wells Fargo, one of the largest banks in the U.S., fell to $45.81 at close Wednesday after a 1.61% decline for the day, versus a 1.12% gain for the S&P 500. The prices places it 2.9% above its 52-week low of $44.50. Since the company exposed the fake accounts and dismissed thousands of employees on Sept. 9, the price slid 8.16%.
Several analysts have changed their ratings on Wells Fargo in light of the events. Morgan Stanley has upgraded the stock from equal-weight to overweight, setting a price target of $53.
“Stock is trading at 11.0x P/E vs. a 3.5% dividend yield, one of the best values in both the group and the S&P 1500,” Morgan Stanley equity analyst Betsy Graseck said in a research note Sept. 20. “Yes, we could see more volatility ahead as headline risk persists, but Wells is rarely this inexpensive. This is an opportunity.”
Other banks hit by scandals have also shaken out the consequences in time. J.P. Morgan (JPM, Financial), perpetrator of the famous “London Whale” scandal, in which it lost more than $6.2 billion in risky derivatives trades, paid a $150 million to a group of investors and $920 million in fines to U.S. and U.K. regulators. The amount had little impact on its profit, which amounted to $17.93 billion in 2013. JPMorgan’s sock also dropped far more than Wells Fargo’s, at 29% from March 30 to a trough on June 1, 2012, as details of its misdeeds came to light. Since then, its stock has gained 98.6% to close at $66.92 Wednesday.
Wells Fargo’s fine will also put only a minor ding in its financials, Graseck said, estimating it at less than 1% of EPS. In 2015, the bank earned $22.89 billion and $4.10 per share in profit.
But the reputational damage, as well as the increased scrutiny indiscretions bring on the banking industry, may overshadow its stock. In January 2015, the CFPB also fined both Wells Fargo and JPMorgan Chase $35.7 million for engaging in illegal marketing-services kickbacks. As recently as Aug. 22, it was ordered to pay $3.6 billion for illegal student loan servicing practices.
"Banks and executives need to recognize that six years post passage of Dodd-Frank, the law continues to get stronger, and no real meaningful rollback appears on the horizon," said FBR & Co. analyst Paul Miller in a research note this week. "Conduct and sales practices of banks are under more scrutiny than many appreciate. Anti-bank populism is very popular among the bases of both political parties, providing little room for error in the financial services industry and considerable political cover to regulators."
Buffett’s stake in the company, at 479,704,270 shares, lost approximately $1.76 billion of its value in the aftermath the exposure of Wells' fake bank accounts, though it has fallen slightly more in value twice year to date. Although Wells is his second-largest holding, his loss totals only 1.3% of the total value of his portfolio.
Buffett, famous for his “center of the court” rule on ethics, has extolled Wells Fargo many times in the past. Earlier this summer, he petition the Federal Reserve for his company, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), to increase its holding of the bank beyond its 10% limit.
In his 2010 annual shareholder letter, Buffett said Wells was “consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength and earning power…” Wednesday, Buffett told Fox Business that he would not comment on Wells Fargo until after the election, meaning his opinion in the wake of the scandal and outlook remain unclear.
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