Last week, I suggested that it was too early to buy Wells Fargo and Co (NYSE:WFC) stock. I suggested that investors wait until all of the bad public relations optics surrounding the company dissipated and the CFPB delivered whatever fine it was going to impose.
Now that WFC has reported earnings, I think I’m going to stand by that position for now. While WFC stock is cheap by some standards, and it wouldn’t be the end of the world to buy here if you had a 10-year investing horizon or longer, I still think there’s some more downside coming — but we are getting close to my target.
Wells Fargo Earnings Report
Total revenue was $21.9 billion for the quarter, down $116 million. Net interest income fell $75 million, although that appears to be the result of two fewer days in the quarter and some swaps that didn’t work out so well. Still, net interest margins remain stable at 2.84%. We like to see higher net interest income from a bank, obviously. We like to see that net interest income increase because its loan balance is increasing. However, loans were down $9.5 billion, driven by declines in legacy consumer real estate loans runoff, and tighter underwriting. Non-interest income was down $41 million.
Total average loans have been relatively flat for quite some time, coming in at $951 billion, down just 1% from last year, with the average loan yield at 4.5%, up 15 basis points.
Deposits also fell $2 billion year over year, but fell $14.4 billion in the quarter, about 1%. WFC stock management has its own explanations for these declines. Personally, I find it difficult to believe that the lousy public relations that WFC is generating isn’t partly behind this decline. Then again, I may very well be wrong, as we see digital active customers increased from 27.9 million to 28.8 million, primary consumer checking customers grew 200,000 to 23.7 million and consumer credit card active accounts grew from 7.6 million to 7.7 million.
Lending Business Not Hurting WFC Stock
I will say that WFC stock is doing a very good job of underwriting its consumer credit card and auto portfolios. Net charge-offs as a percentage of average loan increased only three basis points to 3.69%. Net charge-offs are running about 0.9% of total credit outstanding on credit card accounts.
While the subprime auto lending business is causing me increasing concern, WFC stock continues to generate few losses. Indirect consumer auto loans are at $48.2 billion yet only 0.24% are on nonaccrual, 1.66% have been charged-off and 3% are 30 days past due. The metrics are much more favorable on direct consumer auto loans. A mere 0.15% are nonaccrual, 1.02% have been charged-off and just 0.88% are 30 days or more past due. Commercial auto portfolios have almost no losses.
Meanwhile, for all the people screaming about how unfair student loans are, Wells has $11.88 billion in outstanding student loans, of which only $27 million have been written off, and only $184 million are past due.
Bottom Line on WFC Stock
When you compare the numbers of WFC to Bank of America Corporation (NYSE:BAC), the latter is in much better growth position. I am concerned about a $1 billion fine coming out of the CFPB against Wells, and there continue to be negative PR optics.
However, as I stated in my last article, buying in the mid- to high-$40 area is probably a good place to start. Wells closed on Monday right around the $50 level, so the time to buy grows near.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.