The pandemic year of 2020 has been horrible for America’s biggest banks. No bank has done worse than Wells Fargo (NYSE:WFC). Wells Fargo stock is now down 55% for the year after reporting a $2.4 billion loss and slashing its dividend to 10 cents per share, from 51 cents.
I recently took some of that loss, selling all the shares I had in my retirement account.
Revenue of $17.8 billion was down from $21.6 billion a year ago. The loss came to 66 cents per fully diluted share.
CEO Charlie Scharf, who joined the bank last year, called it “clearly a very poor quarter for us.” It was the bank’s first loss in over a decade. But as with all companies hit by scandal, Scharf claimed the new team he’s recruiting has a handle on the future.
The Basic Problem
The real problem for Wells Fargo stock is more basic than the management problems, or even the business environment.
No one needs banking.
By flooding the zone with new money, the Federal Reserve has made Wells’ main product, cash, irrelevant. Banks are supposed to lend money for more than it cost to borrow it, but the Fed is dropping it on business from helicopters. By the end of June, Wells had processed 79,000 PPP loans totaling $10.1 billion with an average loan size of $6,000. Wells used to make decisions on loans like Scrooge. Now it’s just a clerk like Bob Cratchit.
This is true for all the big banks. Lending just doesn’t pay. JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are all down by about one-third this year. The only banking function that’s working is trading. Morgan Stanley (NYSE:MS) is down only 1%. Goldman Sachs (NYSE:GS) should be up on the year after second quarter trading revenue ballooned.
Since computers can clerk and account better than people, tens of thousands of Wells employees are hitting the bricks. The bank pays out nearly 40 cents in wages for each $1 it brings in, against 30 cents for its main rivals.
But job cuts aren’t the answer. Transactions at ATM machines dropped 28% during the quarter, even while consumer and business deposits were rising nearly 20%.
As our Josh Enomoto wrote recently, the problem for Wells Fargo stock is money velocity. If money isn’t moving, banks can’t make a profit. Wells’ non-performing loans ballooned from $1.2 billion to $7.8 billion at the end of June. Income from its wealth management unit fell 61%. Throwing money from helicopters only covers up the problems.
The Way Forward
Assuming the novel coronavirus pandemic eases, and the Fed takes away the punch bowl, conditions could improve for banks next year.
That could make today’s Wells look like a bargain. The bank’s price-to-book ratio is down to 0.65. During its heyday in the mid-2010s it was usually around 1.3. The price-to-sales ratio is also barely half what it was a year ago, at 1.35.
Wells’ market cap is now below $100 billion. It was expected to open trade July 15 just short of $25 per share. Analysts are now down on the stock, with only 4 out of 19 recommending you buy it, and 5 saying sell.
The Bottom Line on Wells Fargo Stock
You get big profits by buying when there is “blood in the streets.” That is, buy when everyone is screaming sell.
That’s one of two reasons for buying Wells Fargo stock now. This too shall pass.
The other reason is CEO Scharf. He learned his trade at Visa (NYSE:V) and, before that, under Jamie Dimon at JPMorganChase. If you’re going to place a bet here, make it one on the jockey, not the horse.
Dana Blankenhorn has been a financial 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 no shares in companies mentioned in this story.