Should You Hold Wells Fargo (WFC)?

Earnings season is officially underway, with big banks reporting on Friday.

Reactions and results were mixed.

Yet, when we looked at the top banks that were searched by financial pros, we found that Wells Fargo (WFC) barely topped JP Morgan Chase (JPM), which is unusual.

Typically, JP Morgan is considered the gold standard of big banks, whether you’re talking about growth or profitability.

Wells, on the other hand, is the fallen angel, a once favorite of Warren Buffet that let scandals ruin its reputation.

But the TrackStar data doesn’t lie. Something was up.

So, we took a deep dive into Wells Fargo and its recent earnings to see if there was a stock worth buying.

Wells Fargo’s Business

Wells Fargo is one of America’s largest banks, tracing its roots back to the California Gold Rush of 1852. 

With a rich history spanning over 170 years, the company has evolved from a stagecoach express service (hence the logo) to a diversified financial services giant, serving one in three U.S. households and more than 10% of small businesses in the country.

Globally, it operates in 35 countries with a whopping 64 million customers.

The bank’s offerings include traditional banking services, mortgage lending, credit cards, wealth management, and investment banking. 

Despite facing regulatory challenges in recent years, Wells Fargo remains a dominant player in the U.S. banking landscape, with approximately $1.9 trillion in assets and over 4,200 retail bank branches across the nation.

Wells Fargo segments its business into the following areas:

• Consumer Banking and Lending (43% of total revenues) – Offers diverse financial products for consumers and small businesses, including checking and savings accounts, credit cards, and home, auto, and personal lending.
• Commercial Banking (15% of total revenues) – Provides financial solutions to private, family-owned, and certain public companies across multiple industry sectors and municipalities.
• Corporate and Investment Banking (23% of total revenues) – Delivers capital markets, banking, and financial products to corporate, commercial real estate, government, and institutional clients globally.
• Wealth and Investment Management (19% of total revenues) – Offers personalized wealth management, brokerage, financial planning, lending, and trust services to affluent clients.

In its second quarter 2024 earnings report, Wells Fargo posted a net income of $4.9 billion, or $1.33 per diluted share. 

The bank’s performance showed resilience with a 1% increase in total revenue year-over-year, despite a 9% decline in net interest income. 

However, it showed net interest income declining as the spread between the rates it pays depositors and loans narrowed.

Source: Wells Fargo Q2, 2024 Earnings presentation

Forecasted Fed rate cuts would put more pressure on net interest margins. However, higher loan demand could offset some of the impact.

At the moment, higher interest rates are reducing loan demand, while bank deposits are flat.

Lastly, it’s worth noting that credit quality, as measured by net loan charge-offs, is deteriorating, led primarily by the commercial real estate sector.

Source: Wells Fargo Q2, 2024 Earnings presentation

Financials

Source: Stock Analysis

Banks like Wells Fargo used to be growth stocks. But their business has remained stagnant for the last decade.

Profits and margins haven’t really changed, other than some ups and downs with the economy.

It’s effectively become a perpetual dividend stock for most investors, generating a predictable amount of cash annually.

Management returns the cash to shareholders with a 2.3% dividend yield and a share buyback program that yields around 6.6% annually.

But that’s about it.

Valuation

Source: Seeking Alpha

With its lifeless growth, investors have priced Wells a bit cheaper than JP Morgan, Citigroup (C), or Bank of America (BAC). Only the regional bank Fifth Third (FITB) is a touch cheaper, and it carries more risk from the whole regional banking crisis.

It’s interesting to see the disparity between Wells’s and JP Morgan’s price-to-book ratios. Clearly, investors believe JP Morgan will generate more wealth off its assets than Wells might.

Growth

Source: Seeking Alpha

The growth numbers sum up exactly why Wells has been dead money.

Its revenue growth is good but not great. And while the 3-year net income growth looks fantastic, it’s only because Wells was coming off such ridiculously low levels post-pandemic.

Profitability

Source: Seeking Alpha

The return on assets is almost the same across the board because banks don’t tend to generate more per dollar they loan from one place to the next.

What sets them apart is how they grow the business and non-loan income compared to their peers.

Our Opinion 4/10

We don’t see a good reason to jump into Wells Fargo over better banks like JP Morgan.

It doesn’t show any signs of growth, while its net charge-offs keep growing.

You’d be better off betting on Citigroup’s transformation plan or JP Morgan as the gold standard.