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Wells Fargo's Rating Lowered by DBRS on Fake-Account Scandal

Wells Fargo & Company WFC has been rated down to AA (low) from AA by DBRS, a Toronto-based credit rating agency. Its involvement in fake-account scandal has majorly led to this rating downgrade.

The downward rating reflects Wells Fargo’s operational inefficiency and improper management. The rating agency also took into account the bank’s falling reputation because of the several legal issues that have come to light of late.

Further, DBRS also considered the amount of expenses the bank has already incurred and would be facing in the near term.

Wells Fargo has already agreed to pay $142 million in settlement of class-action suit for opening accounts without its customers’ permission. Also, it paid refunds of about $3.7 million to its customers through July 2017.

However, this was not the end for Wells Fargo’s troubles. Some more disclosures regarding problems in other consumer-related products were made.

The bank had been accused of charging high termination fees and unauthorized credit card fees along with issues in its auto insurance business in August 2017. Later, news of Wells Fargo closing authentic bank accounts without permission was reported. Moreover, as a result of an expanded review, the bank revealed that another 1.4 million fake accounts were created by its employees illegally. It has agreed to pay another $2.8 million as refunds to customers.

The regulators are yet to take actions against the bank. Recently, the Fed Chair Janet Yellen called Wells Fargo’s actions "egregious and unacceptable" and disclosed that the Fed is trying to understand the main reasons for these problems.

DBRS’ rating still keeps Wells Fargo among the highest-rated banks because of its diversified franchise and strong capital position. However, the rating agency disclosed that higher-than- expected litigation costs are leading to reduced profits. In fact, any further asset quality deterioration would lead to a negative rating.

Shares of Wells Fargo have gained 17.6% over the past year, underperforming the 36.4% rally for the industry it belongs to.

Currently, the stock carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same space are PNC Financial Services Group PNC, FB Financial Corporation FBK and M&T Bank Corporation MTB. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PNC Financial’s Zacks Consensus Estimate for current-year earnings was revised slightly upward for 2017, in the past 60 days. Also, its share price has increased 47.8% in the past 12 months.

FB Financial’s current-year earnings estimates were revised 2.7% upward, over the past 60 days. Further, the company’s shares have gained 73.2% in a year.

M&T Bank’s Zacks Consensus Estimate for current-year earnings was revised slightly upward, over the last 60 days. Moreover, in the past year, its shares have gained 32.6%.

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