“Phony Accounts” Investigations Haunt Wells Fargo– Short Positions Suggested

Shares of Wells Fargo and Co. closed in the red on Friday, even after the bank reported better-than-expected quarterly earnings. The plunge in the share price was due to concerns over reports related to the creation of about two million accounts by the company without customers’ knowledge.

On Friday, Wells Fargo reported third-quarter earnings of $5.64 billion, or $1.03 a share, down from $5.8 billion, or $1.05 a share in the same period of 2015. Profit recorded in the last quarter was about 2% lower than that of last year, as a low-interest-rate environment dented the bank’s revenue from lending operations.

Average deposits in the retail part of the San Francisco-based bank inched up 0.6% in the third quarter from $708 billion in the second quarter. The number is supposed to not completely reflect the effects of the scandal, which broke in mid-September (two weeks before the quarter ended).

However, Wells Fargo may have felt some heat from the scandal when the number of consumer checking account openings dropped 25% in September from a year earlier and 30% from August. Credit card applications and mortgage referrals from retail banking also fell sharply in September. The fourth-quarter earnings results are expected to give a better read on the damage.

Crisis has engulfed Wells Fargo – the third largest US bank by assets- since last month, when regulators fined the bank $185 million for creating approximately two million bank and credit-card accounts without customers’ consent, in order to meet high sales goals. Nonetheless, Wells Fargo will still have to face a number of ongoing investigations by regulators, as well as private lawsuits.

To help recover from the scandal, the bank has announced a series of changes including eliminating sales goals for its employees and planning to shrink its network of about 6,100 branches to cut operational costs. Still, most analysts have cut profit forecasts for Wells Fargo’s net income for 2017 to around $20.8 billion, down $300 million compared to the average estimate on September 07th, according to Thomson Reuters data.

The state of Ohio is the latest name joining a growing list of municipalities to suspend business relationships with Wells Fargo in the wake of the scandal. With other states and local municipalities, including California, Illinois, and Chicago, Ohio will ban Wells Fargo from bidding for bond underwriting and other types of business.

Additionally, the states of Massachusetts and Oregon, as well as the city of New York, have said they would press for reforms at the bank, while awaiting results of the investigations, and also review their business relationship with the company.

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Fig: Wells Fargo D1 technical chart

Shares of Wells Fargo finished lower in every trading session in the last week, sending the price action back below the short-term MA20. We witnessed a four-day corrective bounce, starting on October 04th after the shares fell as low as 43.55, as sellers had to buy back shares and book profits. The last two candles with long lower shadows indicate sellers’ profit taking ahead of the weekend, therefore, the downside may extend further this week as there is still room for selling, with the price action under pressure from the MA’s placed above the price action and the deteriorating RSI index.

Wells Fargo Trade suggestion

Sell Stop at 44.70, Take profit at 43.55, Stop loss at 45.30

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