Big banks will be challenged in the coming months as the coronavirus pandemic persists, but perhaps no more than Wells fargo (NYSE: WFC).
That’s according to a recent research report by UBS analyst Saul Martinez, who downgraded his rating on the company from neutral to sell, mainly because the bank isn’t earning enough to protect itself against future loan losses. .
UBS has cut its forecast for the bank’s profit in 2020 and 2021 by 47% and 24% respectively. Overall, UBS has cut forecasts for major banks and regional banks by 25% in 2020, on average, and by 18% for 2021.
“[A] a low income base means that headwinds of additional income and expenses have a disproportionate percentage point impact on income, ”Martinez said, according to Barron.
Wells Fargo reported just $ 0.01 per share in its first quarter earnings report, down from $ 1.20 per share the year before, posting the biggest drop in profits of any major bank.
While most banks are expected to struggle this year due to an environment of low interest rates and higher loan losses, Wells Fargo faces an asset cap placed on the bank by the Federal Reserve two years ago for creating millions of fake bank accounts.
The Fed has authorized Wells Fargo to provide emergency small business loans under the Paycheck Protection Program, but the bank must waive all fees associated with the loans.
Martinez also said he was concerned that Wells Fargo was not setting aside enough cash to cover future loan losses, especially on commercial and industrial loans.
The bank only increased its credit supply by around $ 3.1 billion from the first quarter of 2019, while other big banks such as JPMorgan Chase and Bank of America increased their provisions by approximately $ 6.9 billion and $ 3.8 billion, respectively.
Correction: The original version of this report inaccurate the amount by which Wells Fargo increased its credit provision in the first quarter.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.