Wells Fargo (NYSE:WFC) is part of the elite group of diversified banks globally and is back in its element after a robust third quarter. Therefore, WFC stock could be a great recovery-play in the banking sector for post-pandemic success.
The financial sector, in particular, has been one of the hardest hit during the novel coronavirus pandemic. With a sluggish economy and interest rates near zero, banking stocks have given in under immense pressure.
However, such conditions create massive buying opportunities, and investors will be looking to scoop up stocks showing signs of resiliency.
After tanking roughly 60% relative to the S&P in the past year, WFC stock has gained 15.6% since reporting its third-quarter results. Led by its vibrant CEO in Charlie Scharf, the bank aims to cut down on costs and build its assets base.
Longtime Wells Fargo investor Warren Buffett recently slashed his stake in the bank, though doing little to impact its share price. Despite the snap-back in price, the stock at roughly 6.3% lower than its tangible book value per share making it highly attractive at this stage.
Third Quarter Recovery
Wells Fargo had a torrid second quarter, as did its peers. It booked a $2.4 billion loss and had to slash its dividend by 80%. Additionally, revenues were down to $17.8 billion from $21.6 billion in the second quarter last year.
However, it’s quite a different picture in the third quarter, as revenue has risen 118% to $18.9 billion sequentially. Net income has also risen by 186% to $2.04 billion.
On a year-over-basis, results seemed unimpressive. Revenues of $18.9 billion were significantly lower to the $22 billion it generated in the prior-year period. Net interest income, in particular, was down a whopping $2.3 billion from the third quarter of 2019. Average loans and deposits were down 2% and 8%, respectively.
Another positive was the company’s liquidity ratio, which was 134%. Not only did it exceed the regulatory requirements, but it also came in slightly ahead of its second-quarter figure. At the conclusion of the third quarter, the company has a healthy asset base, which totals $1.92 trillion.
Its market cap and asset base are the lowest in the Big Four. The company’s price-to-tangible-book ratio is currently at 0.94, 60% lower than its 10-year median. Hence, those looking to go long on the stock have a fabulous opportunity to take advantage of a massive discount.
Belt-Tightening and Future
Amidst all the uncertainty, one thing is clear that Wells Fargo aims to be trimmed down from what it is currently. CEO Scharf has outlined a plan to cut annual expenses by at least $10 billion. He highlighted his strategy” to exit some things which aren’t core to the U.S. banking franchise.”
There are plans to sell-off the bank’s asset management division, which constitutes $607 billion in assets. Moreover, there are also rumors about it selling-off its corporate trust division.
It is also laying off many of its employees and working hard to close unproductive bank branches. Scharf’s goal for the bank is to become the best-in-class business through improvements in its cost structure and competitive revenue performance.
A significant concern for the bank is the Federal Reserve’s asset cap on it back in 2018. It prevents the bank from exceeding the $1.85 trillion assets figure, which has proven to be a significant impediment to the bank’s ability to deal with smaller interest payments.
Credit quality also remains a concern in the near-term. However, the bank still has a relatively strong asset base with a CET1 ratio of 11.4%, which exceeds the regulatory minimum by $2 billion.
Final Word on WFC Stock
It’s been a tumultuous year for investors, but one that has created many openings which otherwise seemed unlikely. Wells Fargo has understandably had it tough this year but is slowly rebuilding itself after a better-than-expected third quarter.
The management aims to streamline the company in line with its peers and further expand on its profits. Additionally, its attractive price makes WFC stock a great long-term play in the financial sector.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
