The election of Donald Trump has certainly been a nice gift for shareholders of Wells Fargo & Co (NYSE:WFC). Wall Street is betting that there will be a boost from fewer regulations — such as with the paring back of Dodd-Frank — and stronger economic growth. Although, the biggest boost is likely going to come from higher interest rates. Because of all this, WFC stock has gained an impressive 28%.
Granted, the gain is not as large as Bank of America Corp’s (NYSE:BAC) sizzling 49%. But then again, the return on Wells Fargo stock is still on par with other megabanks like JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C).
While all this is great, the party could easily come to an end. And Wells Fargo stock looks to be the most vulnerable to a correction.
More Trouble Ahead for Wells Fargo Stock?
Of course, the fact is that the company has taken a big hit to its reputation because of a wide-ranging scandal, which involved the creation of over two million unauthorized accounts since 2011. As a result, the CEO stepped down and WFC agreed to pay $185 million in fines to the Consumer Financial Protection Bureau and the city of Los Angeles. There are also ongoing investigations from the Department of Justice and the Securities and Exchange Commission.
It’s true that the financial impact may not necessarily be large, say a few hundred million. This is certainly chump change for a company of the scale of Wells Fargo, which sports a market cap of more than $290 billion. What’s more, the euphoria of the rally in bank stocks has made the scandal seem kind of trivial.
Yet this could be a big mistake for investors in WFC stock. Keep in mind that the company’s board is expected to announce its findings about the scandal in April. And there may be other negative headlines from the various governmental investigations.
Interestingly enough, there are already some signs that the scandal has taken a toll. Let’s face it, customers have quite a few choices when it comes to their banking activities.