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Downgrades of Morgan Stanley and Wells Fargo Are Sparked by Disappointing Earnings Reports

January 18, 2024
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Wells Fargo & Co. and Morgan Stanley are facing downgrades from analysts who are scrutinizing fourth-quarter earnings updates and grappling with challenges tied to deposit costs and restructuring efforts at the two major banks.

On Thursday, Odeon Capital downgraded Wells Fargo & Co.'s stock (WFC) from buy to hold as the bank confronts issues stemming from stagnant loan growth and difficulty attracting deposits, according to analyst Dick Bove's research note.

Bove described Wells Fargo's situation as a "wait until next year" scenario, acknowledging that the bank is well-managed and taking appropriate steps for long-term positioning. Despite reporting higher fourth-quarter profits last Friday, Wells Fargo's stock experienced a 0.2% decline in premarket trading on Thursday. Over the past year, the stock has seen an 8.7% increase, while the S&P 500 has risen by 20.6%.

As part of its ongoing restructuring, Wells Fargo is redirecting its focus towards less "labor-intensive" businesses such as capital-market activities and credit cards, moving away from home and car loans as well as business loans, as stated by Bove. The bank is also grappling with the challenge of increased interest rates on products like certificates of deposit.

Bove pointed out a 4.2% decline in car loans for Wells Fargo, while credit-card activity increased by 5.7% based on the bank's fourth-quarter results. Non-interest-bearing deposits for the bank dropped by 6.3%, and interest-bearing deposits rose by 2.9%.

"With loans not growing and deposits hard to attract, the bank is dealing with significant challenges," noted Bove, emphasizing that the margin problem created in recent quarters is unlikely to be resolved until CD rates decrease.

On another front, KBW downgraded Morgan Stanley's stock (MS) from outperform to market perform and reduced the target price from $102 to $91 on Tuesday. Analyst David Konrad expressed concerns about the bank's limited near-term catalysts, particularly in its wealth-management unit, which is undergoing a transition period.

Konrad highlighted a shift of liquidity from deposits into fixed-income products, causing a drop in profitability until investors rotate back into equities. Morgan Stanley's outlook on its wealth-management profit margins has declined to the mid-20% range in the near term, with an expectation of returning to 30% over time.

"While Morgan Stanley turned in a solid quarter and better-than-expected revenue excluding hedging losses, the bank’s wealth-management business remains in transition," said Konrad. Despite the downgrade, Morgan Stanley's stock saw a 0.3% increase in premarket trading on Thursday. Over the past year, the stock has experienced a 10.3% decline, while the S&P 500 has risen by 20.6%.

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