According to the Wall Street Journal, on Monday, the Wachovia Bank of Wells Fargo & Co. (WFC) is in advanced stages of negotiations with the U.S. Justice Department for settling complaints related to the alleged failure in bank controls that enabled Mexican exchange houses to disguise the true nature of drug money.
The matter held ground even before Wachovia Bank was acquired by WFC, when a U.S. attorney condemned the participation of a unit of Wachovia in illegally transferring money to the Mexican exchange houses.
Although these exchange houses thrive on the U.S.-Mexican border, which is the center for money remittances across the border, the Federal officials found that these money transfer sources are also used to move money for drug trafficking. The Federal investigation zeroed in on one of Wachovia’s units as well.
While Wachovia is cooperating with U.S. Federal’s inquiry, it remains compliant with the conditions of the settlement that is expected in a few weeks. On the other hand, WFC is acting responsible for the settlement since Wachovia is now its part. Hence it is at the forefront of managing the issue.
Cash payments, restrictions or agreements guaranteeing future conduct are expected by way of penalties. This could pressure WFC’s market position and financials to some extent.
Estimate Trend Revision
Over the last 30 days, one of the 22 analysts covering the stock has lowered his estimates for the first quarter of 2010, while no upward revisions were witnessed. Currently, the Zacks Consensus Estimate for the first quarter is operating earnings of 40 cents per share, which would be down by 33.1% from the year-ago quarter.
The only downward estimate revision for the first quarter indicates a likelihood of downward pressure on the performance of the stock in the near term.
With respect to earnings surprises, the stock has been steady over the last four quarters, with all four positive surprises. The average remained positive at 52.3%. This implies that WFC has surpassed the Zacks Consensus Estimate by 52.3% over that period.
The downside potential for the estimate for the first quarter, essentially a proxy for future earnings surprises, currently stands at 5.0%.
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