Is Wells Fargo & Co (NYSE: WFC) Likely to Rally Higher In 2018?

January 09, 2018, 12:13 pm ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Wells Fargo & Co (NYSE: WFC) had a terrible year in 2017, which was largely dominated by different scandals relating to the opening of fake accounts among others. The bank was an outlier last year as it was embroiled in scandals that damaged its image among consumers and led to lower profits as compared to its peers.

Article Summary

Wells Fargo was mired by scandals in 2017 and lagged its peers.

The bank’s problems were caused by poor management and unethical sales practices.

The bank has implemented changes to its management that could help it rally in 2018.

Here’s the trading report on WFC.

The bank’s performance lagged behind that of its peers in the financial sector as tracked by the Financial Select Sector SPDR Fund (NYSEARCA: XLF) whose performance matched that of the overall stock market. Furthermore, it recently emerged that regulators had downgraded Wells Fargo’s CAMELS rating with regards to its financial health and its ability to control internal risks.

The recent downgrade is an indicator that the bank’s problems are largely linked to its management. The scandals that have erupted at the bank were the result of a culture geared at rewarding aggressive sales practices with little regard for business ethics and the welfare of the bank’s customers.

However, the bank has implemented numerous changes, especially to its management team, given that former CEO John Stumpf and the former Head of Consumer Banking Carrie Tolstadt were among the high profile executives to leave the bank. A host of other senior executives associated with the scandals that rocked the bank in 2017 have also been axed, which means that the bank now has a chance to reinvent itself.

The bank has not only fired all the top executives linked to scandals, but has gone further to reorganize its board by firing almost half of its board members. Another crucial step taken by the bank was the splitting of the CEO and Chairman role, which is likely to increase the level of accountability among its top executives.

The Federal Reserve interest rate hikes this year are likely to generate significant revenues for Well Fargo given that the bank has about $1.3 billion in deposits, which is second only to JPMorgan Chase & Co. (NYSE: JPM).  The current CEO, Tim Sloan, has instituted a cost-cutting program that will lead to the bank shedding about $4 billion of non-interest expenses, which would increase the bank’s overall profitability.

The recent changes implemented by Wells Fargo will bode well for the bank in 2018, but the question is whether the changes will be reflected in its stock price.

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