Wells Fargo (NYSE:WFC) is still paying for the sins of its past.
Many people, and I include myself in that, thought the past ended when Charles Scharf was hired from Visa (NYSE:V) to run the bank late last year.
I went so far as to buy some shares and have since taken a huge loss. Wells Fargo opened at under $30 per share March 12, after trading at over $50 at the start of the year.
This takes the bank well beyond bargain territory. The price-earnings ratio is below 10. The 51 cent per share dividend yields about 6%. This assumes there are earnings, and that the dividend can be paid, on a bank that had assets of $1.9 trillion at the start of the year.
The Past Is Prologue
William Faulkner once said that “The past isn’t dead. It’s not even the past.”
This is the case with Wells Fargo. Testifying before Congress recently, Scharf acknowledged the bank’s flawed business model and broken culture. He promised changes. But it wasn’t good enough. It wasn’t enough that board chair Elizabeth Duke and board member James Quigley resigned before he spoke. Democrats want people to go to jail.
The promise of Scharf’s predecessor, Allen Parker, was that the bank had learned its lessons from the scandal. But he seems to have spent most of his time trying to minimize the bank’s punishment. House investigators found the company’s culture was not fixed.
Scharf became CEO in October and moved to close the books on the fake accounts scandal, taking a $3 billion fine. The reaction was that the bank got away with murder. The agreement doesn’t cover the mortgage or auto loan business, so bigger fines may be coming. Prosecutors said they wouldn’t pursue criminal charges if the bank cooperates for the next three years.
Since the hearing, Wells has warned of declines in net interest income, and warned that the coronavirus from China could cause even more damage. But the damage it was predicting was minimal, something in the mid-single digits. Those estimates may now be, as was said in the 1970s, inoperative.
Making It Through
The protections built into the banking system after the 2008 financial crisis, and by the Dodd-Frank law, now come into play.
At the end of 2019 Wells Fargo had a capital ratio of 15.3 and could take losses equaling 23.3% of its capital.
This is a substantial buffer against losses that could now be tested. Wells made a lot of loans to the energy sector. The federal government, of course, could also intervene, guaranteeing loans and payments while the nation is under quarantine.
Critics like Dealbreaker, owned by veterans of Bloomberg Media, continue to hammer Wells as hard as Congressional Democrats. They write that morale at the bank is bad, and that Scharf’s plan to turn the bank into a version of JPMorgan Chase (NYSE:JPM) is flawed.
Until Scharf can pull Wells Fargo out of its self-induced dive and past the current crisis, he can’t quickly address the bank’s obsolete technology platform. Scharf’s former employers at Visa now have more than twice the market capitalization of Wells Fargo.
The Bottom Line on WFC Stock
Wells Fargo can weather the current storm. Scharf can reform the bank.
No one is listening to that as fear continues to grip the markets, but thanks to the capital controls created after the 2008 crisis, that’s the case.
Once a bottom is found, investors with cash may want to consider WFC stock. You don’t want to grab the falling knife. Let it drop and keep your cash for now.
But once the run is over, I’m buying more shares.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in WFC and JPM.
