Despite a set of scandals that would have sunk a smaller bank, Wells Fargo & Co (NYSE:WFC) still sells at a premium to other big bank stocks. The bank’s price-book ratio, which is its market capitalization matched to the value of its tangible book assets, is still 1.58. JPMorgan Chase & Co. (NYSE:JPM) boasts a 1.37 P/B ratio.
That’s a smaller gap than the two banks had before Wells was found to be selling services customers didn’t order, but it’s still a gap.
If Wells Fargo had cleaned house thoroughly after the scandal, and could show measurable progress on the sales front, of course, WFC stock might not be overpriced.
But the hits keep coming. Its regulatory rating has been taken down, which the bank admits in an SEC filing is going to have real consequences, far more than the fines imposed to date on the false accounts and discrimination findings. Oh, and it agreed to pay $110 million to account holders over the phony accounts business.
Punished Enough?
The price-book ratio is not the only way to measure a bank’s value. On a price-earnings basis, you can argue WFC stock is now undervalued. Its P/E of 13.95 compares to a 14.26 for JP Morgan and a fat 15.68 for Bank of America Corp (NYSE:BAC), the two big banks with which it is most often compared. Citigroup (NYSE:C), which still sells for a P/B ratio of 0.79 and a P/E of 12.54, continues to be punished by investors for the 2008 crisis and resulting bailout.
You can also argue that all big bank stocks are still undervalued. With the average Standards & Poor company selling at 18 times earnings, price-earnings ratios in the low-teens are dirt cheap. And higher interest rates should improve the outlook for anyone who is trying to sell money for more than they pay for it.
Since the false account scandal broke in mid-September, WFC stock is up 21%. That is less than JPMorgan, up 33%, and a lot less than Bank of America, which is up nearly 50%, but it’s still a substantial gain, a roughly $50 billion addition to the bank’s market cap.
Trump has been a catalyst for bank stocks since the November election, and the Federal Reserve rate hike announced on March 15, which is expected to be followed by at least two more rate hikes later this year, is also good news. But is there a reason to believe Wells’ performance is going to improve soon, and that its book assets are going to outperform those of its peers?
Why the Premium for WFC Stock?
Among other things, the latest regulatory finding will make it harder for Wells Fargo to open new branches and make acquisitions, at least until the “Needs to Improve” is taken down. The bank’s own press release says that moves once rated “outstanding” are now only considered “satisfactory.”
The “whisper number” for the bank’s March earnings, which will come out April 13, is for net income of 97 cents per share, on revenue of $22.19 billion. This is almost identical to the bank’s performance in the December quarter, which in turn was down from previous quarters. Yes, higher interest rates should be good for banks.
But the rate hikes will hit the housing market hardest, because charging more for money means there is less money to buy the house, and Wells Fargo is the country’s largest mortgage lender, with twice the volume of its nearest competitor.
The low interest rate environment from earlier this decade also means most of Wells’ mortgage loan portfolio, estimated at $1.645 billion at the end of 2015, is on low, fixed interest rates. The value of those loans is going down.
Consumer loans, in the form of credit card debt, do adjust their rates quickly in response to Federal Reserve moves. But Wells is only ninth in that category, with 24 million cardholders. By way of contrast, JPMorgan Chase has 93 million cardholders and Bank of America has 32 million.
Bottom Line on WFC Stock
If I were looking for a bank to invest in, I would look for one that is strong in credit cards relative to its size, and which is, like Wells, undervalued relative to its peers.
So how about some love for Capital One Financial Corp. (NYSE:COF)? It’s much bigger than Wells in credit cards (what’s in your wallet), its P/E is lower at just 12.26, and its price-book is Citicorp like at just .858.
That is what I call an undervalued stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
