Fair Isaac's effort to defend its share in the mortgage credit score market could come at the expense of earnings growth, Wells Fargo said in a downgrade Monday.
Analysts warned that the company -- the provider of the FICO score -- is sacrificing a key driver of profit growth by keeping its mortgage credit-score pricing steady, rather than raising it.
FICO shares dropped 6.9% to $758 on Monday. The stock is on track for its worst annual performance on record after falling 54% this year, according to Dow Jones Market Data.
Equifax slid 0.8% on Monday, while TransUnion declined 2.5%, and Experian dropped 3.3%.
FICO said Friday it would hold its mortgage credit-score pricing at $10 for lenders participating in its new Preferred Program, which bundles its traditional FICO score with the newer FICO Score 10T. In exchange, lenders must commit to using FICO scores for all applicable credit checks.
FICO seeks to stave off competition from VantageScore, a joint venture from credit bureaus Equifax, TransUnion, and Experian. FICO's $10 pricing is more than double than the charge for VantageScore 4.0.
Wells Fargo analysts downgraded FICO to Equal Weight from Overweight in a note Monday. They also cut their price target for shares to $735 from $800, implying a roughly 10% decline from Friday's closing price of $815.31.
Wells Fargo had expected FICO to raise prices "meaningfully" as mortgage lenders would likely continue paying for its scores even with higher costs, creating earnings upside. Analysts now expect significant adoption of FICO's Preferred Program will sustain demand, but with limited earnings upside.
Wells Fargo lowered its adjusted earnings estimate for FICO's 2027 fiscal year to $48.02 a share, down from $49.65.
Banks will likely remain slow to adopt VantageScore because of regulatory scrutiny and concerns about its ability to predict defaults, analysts wrote. Many lenders will still use both scoring systems to compare results, but Wells Fargo research suggests VantageScore more often produces favorable mortgage pricing.
BMO Capital Markets called mortgage pricing the "most important earnings lever" in a note Monday. The firm said FICO's decision to keep prices flat means the company loses out on a major opportunity to boost profits in fiscal 2027.
FICO stock -- coming off its worst quarterly performance on record -- has come under significant pressure in recent weeks. Last month, Bill Pulte, director of the Federal Housing Finance Agency, said mortgage pricing would be simplified under a new structure that incorporates VantageScore.
That decision means lenders don't have to exclusively rely on FICO scores. Rocket Mortgage, part of Rocket Cos., became the first mortgage lender to use VantageScore 4.0 as its preferred credit scoring model.
Comments