Is Wells Fargo Now a Big Money Favorite?

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When earnings season kicks off, we typically see search volumes for bank stocks rise since they’re the first to report.

However, JP Morgan typically comes out on top.

This time, it’s Wells Fargo (WFC), the former star of Warren Buffet’s investment portfolio.

A combination of the ghost-checking account scandal and home loan declines has hindered the company’s efforts to revitalize its brand.

And despite extremely heavy search volume by financial pros, we don’t see many reasons to own this stock.

Wells Fargo’s Business

Wells Fargo began as a stagecoach company in 1852, transporting gold and valuables from the California Gold Rush.

Today, the company is known for its community-based approach to finance and banking.

Wells Fargo segments its business into the following areas:

• Community Banking (50% of total revenues) – Includes various financial products and services for consumers and small businesses, including checking and savings accounts, credit and debit cards, and auto, student, and home equity loans.
• Wholesale Banking (30% of total revenues) – Provides a comprehensive line of banking, investment and financial services to businesses, government entities and financial institutions.
• Wealth and Investment Management (20% of total revenues) – Delivers a full range of personalized wealth management, investment and retirement products and services to clients across U.S.-based businesses and international clientele.

Rate hikes have been a double-edged sword for Wells Fargo.

Net loan charge-offs crept higher over the past year as the economy appeared to sour:

Source: Wells Fargo Q3 ‘23 Investor Presentation

On the flip side, Net Interest income rose, though it appears to be tapering:

Source: Wells Fargo Q3 ‘23 Investor Presentation

It’s also worth noting that deposits shrank over the past year by 3% while the cost of those deposits rose 0.12%.

Source: Wells Fargo Q3 ‘23 Investor Presentation

Interestingly, the decline in deposits coincided not with the regional banking crisis but with the rise in interest rates. Likely, savers moved funds into higher-yielding money market accounts.

Financials

Source: Stock Analysis

Revenues shrank during the pandemic as economic activity declined.

The rebound coincides with higher interest rates.

However, operating and profit margins are some of the lowest they’ve been in years, which isn’t the case for peers like JP Morgan (JPM).

Wells Fargo is particularly exposed to home loan originations, which declined dramatically last year as housing inventory contracted.

For perspective, net loans increased $57.6 billion in 2021. In 2022, that dropped to $9.5 billion, the lowest since 2013.

Nonetheless, Wells generates enough cash to pay its current 3.3% dividend on common shares and preferred share dividends yielding 7.1%.

Valuation

Source: Seeking Alpha

At first glance, we note that Citigroup (C) is the cheapest of the group across the board.

Wells Fargo trades near the cheaper end with Bank of America (BAC), while JP Morgan and US Bancorp (USB) are more expensive.

This isn’t surprising given the higher quality performance of JP Morgan relative to its peers.

But it begs the question of whether Wells Fargo, Bank of America, or Citigroup is the better buy down here.

Growth

Source: Seeking Alpha

Bank of America gets the top marks for revenue growth amongst the lower end, while JP Morgan trounces everyone.

However, Wells Fargo has the best YoY EPS growth. But looking forward, it expects a decline in earnings.

Profitability

Source: Seeking Alpha

Profitability is measured slightly differently for banks.

The best metrics are net income margin, return on equity, and return on assets.

Wells Fargo actually comes out on top for return on assets.

However, its net income margin and return on equity trail Bank of America, JP Morgan, and US Bancorp.

Our Opinion 5/10

Wells Fargo may one day return to its former glory.

However, it is overly exposed to housing loans, which we don’t expect to rise anytime soon.

We also believe it’s topped out on the gains from net interest income and faces a challenging couple of quarters ahead.

Despite the higher price tag, we like JP Morgan as the better buy.

However, if you’re looking for something a bit cheaper, then we think Bank of America is the next best bet.

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