Wells Fargo & Co (NYSE:WFC) delivered earnings that beat street estimates on April 13, but the stock did not benefit.
The company said it earned $5.9 billion during the quarter ending in March, $1.12 per share fully diluted. Revenue of $21.9 billion was down from the $22.3 billion of a year ago. The bank said it returned $4 billion to shareholders, up from $3.1 billion a year ago, in the form of dividends and stock repurchases.
Despite this, shares fell about 3.7%, the worst performance among the big banks, mainly on news WFC may have to pay $1 billion in fines after charging for auto insurance products people didn’t need and unnecessary fees to lock-in mortgage interest rates.
These fines are different from the scandal over unauthorized accounts that cost former CEO John Stumpf his job and Wells its reputation.
But Is It Getting Better?
Analysts who are bullish on Wells admit the bank is “not out of the woods” but Wells Fargo stock can move higher if people focus on the future.
That future remains murky.
In January, the Federal Reserve said it would restrict the growth of the bank and demand the replacement of four board members. In the last action taken by former chair Janet Yellen, the bank was told not to take any action that would increase its consolidated asset levels past those of December, while it works on improving compliance.
New Fed chair Jay Powell voted in favor of the actions, which the bank was told to respond to this month. It is still unknown how much the bank will have to pay to settle the charges.
Some analysts question whether the bank has undergone the fundamental change the Fed is requiring, noting that while it is paying more in fines, and its loan growth is negative, it does not seem to be hiring the number of compliance and risk managers it would take to restore confidence.
At its April 16 opening price of about $51 per share, Wells is trading at just 12 times earnings despite a dividend that yields over 3%. JPMorgan Chase & Co. (NYSE:JPM), by contrast, is trading at 17 times earnings and its dividend yields just 2%. Its stock is up slightly for the year while that of Wells has fallen nearly 17%.
Waiting It Out
The bank could be betting that the Administration’s deregulation push will let it skate on past charges and won’t cost it much in the future.
If you agree with that analysis, WFC stock is a bargain. Wells shouldn’t have to do much more than it has, future fines might not come in as the Consumer Financial Protection Bureau (CFPB) is neutered by executive order, and consumers may have short memories, while last year’s tax cuts are padding earnings and rising interest rates are going to pad them further, increasing the margins banks get on loans.
Wells is looking to its ad agency to repair its reputation, with ads focusing on bake sales, first homes, and former coal miners turning their lives around. The slogan is “building better every day.”
The Bottom Line
Most InvestorPlace writers consider Wells a no-go zone. Lawrence Meyers says you should stay away for now, and Will Healy writes that despite Warren Buffett continuing to hold it, you shouldn’t.
But bargains are hard to walk away from. If you’re not supposed to buy until there is “blood in the streets,” WFC is looking bloodier than any other big bank. If you have patience and faith in the short memories of your fellow man, the current price is hard to resist.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now 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.
