Morgan Stanley Adjusts Wells Fargo Rating to Equal-Weight Amid Valuation and Net Interest Income Concerns

Morgan Stanley Revises Wells Fargo Rating to Equal-Weight

On September 29, 2025, Morgan Stanley announced a downgrade of Wells Fargo & Company (NYSE:WFC), moving its rating from "Overweight" to "Equal-Weight." This adjustment signals a more neutral stance on the banking giant's stock, primarily influenced by valuation considerations and the firm's revised outlook on Wells Fargo's net interest income (NII).

The Event in Detail: Valuation and NII Concerns

The downgrade stems from Morgan Stanley analyst Betsy Graseck's assessment that Wells Fargo's stock has already factored in an anticipated increase in the company's guidance for Return on Tangible Common Equity (ROTCE) beyond its current ~15% target. This suggests that much of the potential positive news regarding the bank's profitability metrics is already priced into its shares.

A key driver of this revised outlook is Morgan Stanley's less optimistic forecast for Wells Fargo's net interest income (NII). The firm projects a contraction in net interest margin (NIM) through year-end 2026, anticipating 125 basis points of Federal Reserve rate cuts. This contraction is expected as the pressure from floating loans is predicted to outweigh the bank's ability to effectively reprice deposits. Consequently, Morgan Stanley's NII estimates for Wells Fargo are 1.5% below consensus for 2026 and 2.5% below for 2027.

Following the announcement, Wells Fargo's stock experienced a modest decline of 0.4% in early Monday trading, closing at $84.48 with a trading volume of 1,390,187 shares.

Analysis of Market Reaction: Limited Upside Despite Higher Price Target

Despite the rating downgrade, Morgan Stanley did increase its price target for Wells Fargo shares to $95 from $87. This revised target suggests a potential upside from current levels; however, the firm perceives this upside as more constrained when compared to other "Overweight"-rated stocks within the large bank group. A significant catalyst, the removal of the asset cap, is now considered to be in the past for Wells Fargo, with the market largely having assimilated its impact.

Morgan Stanley's Equal-Weight rating aligns with the SA Quant rating and the average SA Analyst rating, both of which currently stand at "Hold." This contrasts with the broader Wall Street consensus, which maintains an average "Buy" rating for Wells Fargo. The market's initial reaction reflects a cautious adjustment to the revised expert sentiment.

Broader Context and Implications: Mixed Signals and Valuation Pressures

The financial sector is navigating an environment of evolving capital rules, unpredictable interest rate cycles, and shifting growth expectations. While Wells Fargo has demonstrated robust financial performance with revenue growth of 7.1% over the past three years and a trailing twelve-month sales figure of $81.46 billion, concerns persist. The bank's net margin of 25.27% indicates strong profitability, yet its debt-to-equity ratio of 1.16 suggests a moderate level of leverage. The issuance of $177.2 billion in new debt over the past three years, though deemed acceptable given its overall financial position, contributes to a "poor" financial strength rating primarily due to substantial debt levels.

Valuation metrics further suggest potential overvaluation. Wells Fargo's Price-to-Earnings (P/E) ratio of 14.48 is near its three-year high of 15.84. Similarly, its Price-to-Sales (P/S) ratio of 3.5 and Price-to-Book (P/B) ratio of 1.66 are close to their respective 10-year highs. The put/call ratio for WFC stands at 1.10, indicating a marginally bearish sentiment among options traders, as put options generally reflect bearish bets.

Expert Commentary: Focus on NII and Rate Cuts

Morgan Stanley analyst Betsy Graseck highlighted the core concerns, stating:

"Additionally, our work shows that Wells is not a beneficiary of rate cuts, with our NII estimates now below consensus due to expected NIM contraction."

This perspective underscores the challenge banks like Wells Fargo may face in a declining interest rate environment, where the ability to maintain or expand net interest margins becomes constrained.

Looking Ahead: Upcoming Earnings and Strategic Adjustments

Investors will closely monitor Wells Fargo's upcoming Third Quarter 2025 earnings release, scheduled for Tuesday, October 14, 2025. The consensus EPS forecast for Q3 2025 is $1.54, compared to $1.42 in the same period last year. This report will be critical in either confirming or counteracting the revised analyst sentiment.

Beyond earnings, several recent corporate actions could influence future performance and sentiment. These include a 12.5% increase in the quarterly common stock dividend to $0.45 per share, signaling confidence in financial health. Additionally, Wells Fargo Bank decreased its Prime Rate to 7.25 percent on September 17, 2025, which will impact NII depending on market conditions. The company has also announced layoffs for 2025, as part of a broader strategy to streamline operations and manage costs, which could be viewed positively by those focused on efficiency. The anticipated FY26 guidance in January, including a potential increase in the ROTCE target, remains a key event, though largely priced in.