UBS Says Sell Wells Fargo, Contends Risks Aren’t Reflected In Stock Price

UBS initiated coverage of Wells Fargo (WFC) with a Sell rating today, warning that the bank is facing significant risks that aren’t reflected in its valuation.

WHAT’S NEW: Weak risk appetite among retail investors, along with lackluster macro trends, creates risks for Wells Fargo’s Wealth and Investment Management unit, according to UBS analyst Brennan Hawken. Additionally, the Department of Labor’s new proposed fiduciary rules could weigh on the bank’s revenue from its affluent retail clients over the longer term, wrote Hawken, noting that Wells is more exposed to that business than most of its peers. Meanwhile, Wells’ mortgage revenues probably won’t be very strong for some time, the analyst believes. On the credit front, Wells Fargo’s auto loans are riskier than most of its peers, and its energy portfolio “appears more biased to risky loans” than UBS had previously expected, the analyst stated. Wells Fargo is also facing tough competition in the credit card market and its valuation is “at the high end” of its peers,” Hawken warned. He set a $45 price target on the shares.

WHAT’S NOTABLE: On March 3, renowned bond investor Bill Gross predicted that banks’ return on equity would be similar to utility stocks going forward. Banks will be hurt by very low interest rates and intense regulations, Gross believes. The sector looks to be “permanently damaged,” and is likely to be beset by write-offs and significant margin declines going forward, according to Gross.

OTHERS TO WATCH: Other publicly traded big U.S. banks include Bank of America (BAC), Citi (C), Goldman Sachs (GS), JPMorgan (JPM), Morgan Stanley (MS) and U.S. Bancorp (USB).

PRICE ACTION: In early trading, Wells Fargo dropped 2% to $48.74. The stock is down slightly from its $50 close on March 15, the day before the Fed indicated that it only plans to hike interest rates twice this year, down from its previous target of four such increases.