Amidst poor performance, mounting legal bills, and accusations of bad governance, Wells Fargo & Company (NYSE: WFC), the third-largest bank in the US, has decided to close its operations in four states in the US. The decision is part of a larger plan to unplug on more than 800 branches by 2020 and manage the remaining 5,000 locations. In 2017, Wells Fargo pulled down the shutters in 214 locations. The business reorganization cannot solve all the issues faced by the bank, as discussed below. We expect the stock of Wells Fargo, which closed at $55.58 to take a hit in the days to come.
The San Francisco, California-based bank is closing all of its branches in Michigan (14), Ohio (1), and Indiana (33). Additionally, Wells Fargo is also closing four of its branches in Wisconsin but will retain 48 of its branches. Flagstar Bancorp (FBC), a largely unknown bank outside the US, is acquiring all the branches (52) sold by Wells Fargo.
The deal is expected to be completed by the fourth quarter of 2018. Flagstar Bancorp’s customer base will double upon completion of this acquisition. The Michigan-based Flagstar has about 3,500 employees and is valued at $2 billion. Notably, Wells Fargo’s market cap is about $267 billion and employs nearly 263,000 people. The branches will continue to work as Wells Fargo locations until the deal is completed. Flagstar has confirmed that it will retain all branches and employees “at closing”. While Wells Fargo is closing down branches, its competitor JP Morgan is planning to invest $20 billion to open another 400 branches by 2023.
Wells Fargo, however, will continue to have some commercial lending, retail brokerage, wealth management, and home lending operations in the four states. The 490 employees working in those branches will become Flagstar employees. Flagstar will pay $2.50 billion to Wells Fargo. These four branches have $2.30 billion in deposits. So, Flagstar is buying the branches at a small premium of 7%.
Wells Fargo is left with no other option to convince investors and regulators that it is taking steps to clean up the mess. Earlier this February, The Federal Reserve slapped Wells Fargo with never before seen sanctions for “widespread consumer abuses”. The Fed will not allow Wells Fargo to grow its assets beyond $2 trillion until it is convinced that the bank is not bending the rules. Wall Street is putting severe pressure on Wells Fargo to cut costs as the bank is staring at huge legal bills linked to the fake accounts scandal. The bank has acknowledged that a lot more work needs to be done to fine-tune the operations.
Last July, the bank admitted that its employees opened as many as 3.50 million accounts without authorization from customers. Further investigations revealed that the bank had charged customers for auto insurance they never required. Some of the branches overburdened customers with unnecessary mortgage fees. The auditing also revealed that some of its employees have tampered with business documents of customers in 2017 and early 2018. Last month, the bank agreed to pay $480 million to the Department of Justice to close the fake accounts scandal. So, the closure of branches is only the beginning of the cleanup process. Therefore, the stock will continue to remain bearish in the short-term.
The historical price chart indicates a firm resistance to the stock at 56. Furthermore, the stochastic oscillator is making lower highs. Therefore, we are expecting the stock of Wells Fargo to remain bearish in the short-term.
We prefer to invest in a put option contract to benefit from the impending decline in the stock price. Before blocking our surplus funds, we would look for an option contract which expires on or around June 15. Furthermore, the stock of Wells Fargo should be trading near $56 in the NYSE.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
