When Wells Fargo & Co (NYSE:WFC) reports earnings before the market opens on Thursday, investors are expecting familiar results. A Q1 profit of 98 cents per share of WFC stock, as its whisper number indicates, would be within a nickel of each of the past five quarters.
But the firm’s scandals — and its ham-handed reaction to them — are keeping the bank down.
Wells Fargo boasts a price-to-book ratio of 1.54, closing in on JPMorgan Chase & Co.’s (NYSE:JPM) 1.34. The same is true of its price-to-earnings ratio, now 13.7 against JPM’s 13.9.
Wells was once the gold-plated darling of bank stocks. At one time, its P/B was the only one of the Big Four banks that was over 1. In those halcyon days — as recently as last year — WFC stock traded more like a well-run regional bank than a money center bank.
Gold-Plated No More
The hits that started with the downfall of former CEO John Stumpf keep coming. I called the bank’s situation a gold-plated doghouse. The plate is flaking off.
A report last month showed an “extensive and pervasive” pattern of discrimination at Wells Fargo, showing that even in its best days early this decade it failed to live up to the terms of the Community Reinvestment Act. The move will hamper the bank’s ability to make acquisitions.
International Shareholder Services, which seeks to represent the interests of small shareholders, now wants 12 of Wells’ 15 directors to go. The board called the report “extreme and unprecedented,” but the group might just agree with that and repeat the finding.
The bank insists it is putting the bank behind it, continuing to claw back money from Stumpf and the former head of retail banking, Carrie Tolstedt. A 113-page internal report showed people were fired for not going along with the program as early as 2002, but it largely exonerated current CEO Tim Sloan and his team.
Where Do We Go From Here?
Ironically, WFC stock is now trading about 10% above where it was before the scandal became public.
While there have been catalysts for all big banks — rising interest rates and Trump optimism being the most prominent — our James Brumley finds it increasingly difficult to understand the bank’s higher valuation.
“Maybe Wells Fargo stock isn’t one of the best bank stocks in the world after all,” he concludes, and he’s right.
Based solely on its performance, there seems little reason to rate its prospects as better than those of JPMorgan or even Bank of America Corp (NYSE:BAC), which still trades below its book value. Morgan has a much bigger trading desk than Wells, and Bank of America’s Merrill Lynch unit means it has a bigger investment bank than WFC.
Wells Fargo’s lead, and reputation, was tied to its performance as a mortgage lender. It had twice the market share of its nearest rival as recently as 2015. A recent listing of the best mortgage lenders had it barely in the top 10, while banks in general are being hammered by online alternatives like Quicken Loans.
Should You Buy WFC Stock?
Rising interest rates should help all banks, even Wells Fargo, and the market is anticipating two more interest-rate hikes in 2017 as the Trump administration seeks to keep inflation rising.
But there are better bank bargains out there.
You can buy JPMorgan and its 2.3% dividend for safety. You can buy Bank of America for capital gains. Better yet, I recommend regional banks like Prosperity Bancshares, Inc. (NYSE:PB) of Texas, up 21% in the last six months, or even Regions Financial Corp (NYSE:RF), up 37% in that time. If you want to speculate on a bank, go with Citigroup Inc (NYSE:C).
Being a bank that did banking made Wells Fargo look good. When it gets back to that, it may do well again. Until it’s out of the headlines, you can find better bargains than WFC 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 firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.