Wells Fargo Sinks on Fed Punishment, But Some Find What to Like

Wells Fargo shares tumbled 9.5 percent in pre-market trading after the Fed banned the bank from growing, just as other banks seem poised to benefit from an expanding economy, more lending and lower taxes. 

Analysts at firms including Citi, JPMorgan, Morgan Stanley and RBC downgraded their ratings, using language like “Fed doesn’t pull any punches,” Fed “pounces,” and noting Wells Fargo “will have to be defensive.” That’s amplifying Friday’s shares decline, when banks across the board slipped after the Fed revealed stress test instructions that were tougher than expected.

Yet some analysts are finding good in the situation. The Fed’s enforcement effort may create “political capital” it can use to justify regulatory relief for big banks and that Congress can use to enact legislation easing regulations, Cowen’s Jaret Seiberg writes in a note.

Since the Fed made its move on Janet Yellen’s last day, Democrats offered little criticism for waiting so long. It’s also positive for new Fed Chairman Jerome Powell, as he can start his tenure touting the action instead of answering questions about why the Fed hasn’t done anything about the fake account controversy. “Creating the perception that regulators are willing to take harsh actions against mega banks for misdeeds is critical in building and maintaining political support for bank deregulation,” Seiberg writes.

Nomura Instinet’s Bill Carcache concurs in a note that the Fed’s order “offers a healthy progress sign,” as the “unprecedented penalty may allow political pressure to ease.” He also writes that the “financial impact is manageable.” He’s among the analysts keeping a buy rating on the bank.