At least that is what each company’s latest earnings report says about the banking sector. The JPM earnings report was really strong. The C earnings report had some good and some bad. As for the WFC earnings report, it was pretty much all bad.
JPM reported a double-beat quarter. Net interest income was up 9%. Loans were up 7%. Deposits were up 5%.
In contrast, WFC reported a double-miss quarter. Net interest income was up just 1%. Loans were down 1%. Deposits were down 2%.
Why the huge discrepancy in operating results for the two banks? JPM earnings underscore that the company is paving the path for the future of technology-enhanced and digitally infused banking. WFC earnings, meanwhile, underscored that the company is still working through a laundry list of scandals, the sum of which is weighing on public opinion and operating results.
Will this continue? For the foreseeable future, yes. WFC stock just isn’t cheap enough and the growth narrative just isn’t good enough to warrant this stock being a winner at this point in time.
Here’s a deeper look.
WFC Earnings Were a Mess
There really is no other way of saying it. WFC earnings were a complete mess.
The company missed on already low revenue expectations. They missed on already low earnings expectations, too. How? Because revenue and profit were down in Community Banking, Corporate and Wholesale Banking and Wealth Management. That’s how.
Also, average loans fell. Average deposits fell. Mortgage banking fees, stung by anemic refinancing, dropped 33%. Expenses were up. And net interest income, which was supposed to get a big boost from higher rates, rose only 1%, versus a 9% gain at JPM.
Across the board, the numbers weren’t that good. That speaks to the fact that this company, while still a powerful banking institution with long-term staying power, is working through a laundry list of scandals that date back to 2016 when it was discovered that bank employees were creating fake accounts to meet sales targets. Since the scandal list has only gotten longer, and WFC’s headaches have only grown.
The big problem here is that these scandals will continue to weigh on operations into the foreseeable future. Meanwhile, the few good things about Wells Fargo (higher net interest income, bigger dividend and more buybacks) might end soon.
The 10-Year Treasury Yield has stalled out in the 2.8% to 3% range as investors have flocked back into bonds amid rising trade tensions. That doesn’t bode well for net interest income growth going forward. Meanwhile, the bigger dividend and buybacks are a result of tax cuts and stress test successes. Those tailwinds are both near-term in nature.
Wells Fargo Stock Isn’t Cheap Enough to Account for the Mess
Overall, WFC earnings were a mess, and contribute to the entire WFC growth narrative looking quite unattractive today. Unfortunately, WFC stock just isn’t cheap enough considering how ugly the growth narrative has become over the past several quarters.
WFC stock still trades at around 1.5X book value. That is roughly in line with historical standards, and doesn’t really imply a valuation bottom is in. If the stock drops to 1.3X book value, like it did in late 2016, that would be the time to buy.
Meanwhile, the dividend yield is at 2.8%. While that is a healthy yield, it also isn’t the sort of “buy the dip” yield that would imply a bottom in the stock. In late 2016, the dividend yield rose all the way to 3.5%. Thus, I’d like to see a dividend yield north of 3% before I start buying the dip in WFC stock.
Bottom Line on WFC Stock
WFC earnings were a mess and contribute to the whole WFC growth narrative being messy today. WFC stock isn’t cheap enough considering just how messy the underlying growth narrative is, and as a result, WFC stock could be weaker for longer.
As of this writing, Luke Lango was long JPM stock.
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