Analysts are retreating from their bullish calls for Wells Fargo (NYSE: WFC) shares because they believe the Federal Reserve's surprising enforcement action will hurt the bank's financial results and hang over the stock for most of 2018.
The U.S. Federal Reserve said Friday it is restricting Wells Fargo's size in response to "widespread consumer abuses." Washington is prohibiting the bank from growing any larger than its total assets as of the end of 2017 until "sufficient improvements" are made.
At least five Wall Street investment banks downgraded the shares following the news.
RBC Capital Markets reduced its rating for Wells Fargo shares to underperform from outperform, predicting the restrictions will detract from investor sentiment.
Other Wall Street firms focused on the financial impact from the Fed's asset growth limitations for the bank.
Keefe, Bruyette & Woods lowered its rating for Wells Fargo shares to market perform from outperform, saying the Federal Reserve's action will hurt the bank's earnings.
One Keefe analyst reduced his price target for Wells Fargo shares to $63 from $70, representing 2% downside to Friday's close.
One top Wall Street firm noted the extreme nature of the Fed's regulatory move against the bank.
J.P. Morgan lowered its rating to underweight from neutral for Wells Fargo shares, citing the unprecedented nature of the Fed's action.
Wells shares ducked $5.46, or 8.5%, to $58.61, within a 52-week trading range of $49.27 to $66.31.