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Wells Fargo (WFC) Down 7.5% in 3 Months: To Buy or Stay Clear?
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Wells Fargo & Company's (WFC - Free Report) shares tumbled 7.5% in the past three months, significantly underperforming the industry’s growth of 4%. During this period, the S&P 500 moved up 5.3%.
3-Months Price Performance
Image Source: Zacks Investment Research
WFC is currently trading below its 50-day moving average, indicating a bearish sentiment among investors.
50-Day Moving Average
Image Source: Zacks Investment Research
The stock is currently down 9.8% from its 52-week high of $62.55. Given the recent weakness in the WFC stock, investors might be tempted to buy it. But is this the right time to buy? Let’s find out.
What Triggered the Downfall?
Several factors have contributed to WFC’s recent slump. The broader market has been frazzled due to apprehensions over the Federal Reserve's interest rate policies and fears of a looming U.S. recession. These macroeconomic worries have certainly put pressure on banking stocks, including Wells Fargo.
Other stocks from the same space that also registered a decline are Citigroup (C - Free Report) , down 3.2% and Bank of America (BAC - Free Report) , down 0.7%, in the past three months.
Asset Cap: A Major Red Flag
The biggest drawback of WFC is that it has an asset cap of $1.95 trillion imposed by the Fed because of the 2016 sales scandal until it complies fully with regulators’ demands regarding compliance and operational risk management.
Though the company has undertaken several measures to meet regulators' requirements, the asset cap is hindering it from fully capitalizing its loan portfolio. Thus, this will likely continue to impede growth in the upcoming periods.
Legal Scrutiny Disappoints Investors
WFC faced significant challenges with numerous penalties and sanctions. It is under government authorities' investigations on issues related to anti-money laundering (AML) and sanctions programs. In July 2024, the company faced a class action lawsuit alleging that it mismanaged its employee health insurance plan, forcing thousands of U.S.-based employees to overpay for prescription medications. This lawsuit seeks statutory fines and unspecified damages on behalf of a nationwide class of WFC health plan participants and beneficiaries, which might number tens of thousands.
Long-Term Prospects Remain Bright
Rate Cut Signal: The Fed signaled a rate cut beginning September. This will turn out to be favorable for banking stocks reeling under high funding costs, including WFC. While high rates have led to a significant jump in NII, they have driven up funding and deposit costs, thus squeezing banks’ margins.
Considering the subdued loan demand and other factors like interest rates, asset repricing, competitive market conditions and the broader economic environment, the company expects full-year 2024 NII to be in the upper half of the range of a decline of 7-9% from 2023 levels or to be down 8-9%.
Management stated that if the Fed were to start cutting rates later this year, deposit pricing would begin to decline, with the most immediate impact from new promotional rates in its consumer business and standard pricing for commercial deposits, where pricing moves faster as rates increase.
Diverse Revenue Streams: WFC is diverging revenue sources and reducing its reliance on NII. It has been methodically strengthening its corporate investment bank as it sees significant growth opportunities.
WFC significantly raised advisor retention in its wealth and investment management division and has put more emphasis on serving its consumer banking clients and independent advisers, both of which should eventually spur development. The company's goals in the Commercial Bank division are to expand its treasury management business and provide clients with its investment banking and market capabilities.
Impressive Capital Distribution: Wells Fargo rewards its shareholders handsomely. In July 2024, it received approval to raise its dividend by 14.3% to 40 cents per share beginning the third quarter of 2024. The company also has a share repurchase program in place. In July 2023, its board of directors authorized a new share repurchase program worth $30 billion. As of Jun 30, 2024, the company had the remaining $14.7 billion worth of common stock to repurchase. Management expects to slow the pace of repurchasing activity in the short term until it receives clarity on the Basel 3 end-game. This will allow the bank to retain more capital amid the uncertain macroeconomic environment.
The company has a strong liquidity position, with a liquidity coverage ratio of 126% as of second-quarter 2024. As of Jun 30, 2024, its liquid assets (including cash and due from banks and interest-earning deposits with banks) totaled $232.0 billion.
Earnings Estimate Trajectory
Analysts seem to be neutral about Wells Fargo's prospects. Over the past seven days, the Zacks Consensus Estimate for 2024 and 2025 earnings has remained unchanged.
Estimate Revision Trend
Image Source: Zacks Investment Research
Trading at A Discount
From a valuation standpoint, Wells Fargo appears somewhat inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 10.56X, below the industry average of 11.52X.
The stock is significantly cheaper than its peer, BAC’s current forward 12-month P/E of 11.31X. WFC is trading at a premium to C’s current forward 12-month P/E of 9.31X.
Image Source: Zacks Investment Research
Final Thoughts
While WFC's recent price drop seems promising, caution is warranted for prospective investors. While the bank’s long-term prospects remain intact, near-term challenges are a concern.
With an asset cap in place, WFC’s loan balance is not likely to improve much, hindering its growth potential.
The company’s performance in the future will be greatly influenced by the Fed’s interest rate change decision in the upcoming months. Also, its ongoing legal scrutiny is a matter of concern. Considering these, we conclude that investors should keep a close eye on these issues before taking any investment decision.
Those who already own the WFC stock in their portfolio can retain it as it is less likely to disappoint over the long term, given its strong fundamentals. It carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Wells Fargo (WFC) Down 7.5% in 3 Months: To Buy or Stay Clear?
Wells Fargo & Company's (WFC - Free Report) shares tumbled 7.5% in the past three months, significantly underperforming the industry’s growth of 4%. During this period, the S&P 500 moved up 5.3%.
3-Months Price Performance
WFC is currently trading below its 50-day moving average, indicating a bearish sentiment among investors.
50-Day Moving Average
The stock is currently down 9.8% from its 52-week high of $62.55. Given the recent weakness in the WFC stock, investors might be tempted to buy it. But is this the right time to buy? Let’s find out.
What Triggered the Downfall?
Several factors have contributed to WFC’s recent slump. The broader market has been frazzled due to apprehensions over the Federal Reserve's interest rate policies and fears of a looming U.S. recession. These macroeconomic worries have certainly put pressure on banking stocks, including Wells Fargo.
Other stocks from the same space that also registered a decline are Citigroup (C - Free Report) , down 3.2% and Bank of America (BAC - Free Report) , down 0.7%, in the past three months.
Asset Cap: A Major Red Flag
The biggest drawback of WFC is that it has an asset cap of $1.95 trillion imposed by the Fed because of the 2016 sales scandal until it complies fully with regulators’ demands regarding compliance and operational risk management.
Though the company has undertaken several measures to meet regulators' requirements, the asset cap is hindering it from fully capitalizing its loan portfolio. Thus, this will likely continue to impede growth in the upcoming periods.
Legal Scrutiny Disappoints Investors
WFC faced significant challenges with numerous penalties and sanctions. It is under government authorities' investigations on issues related to anti-money laundering (AML) and sanctions programs. In July 2024, the company faced a class action lawsuit alleging that it mismanaged its employee health insurance plan, forcing thousands of U.S.-based employees to overpay for prescription medications. This lawsuit seeks statutory fines and unspecified damages on behalf of a nationwide class of WFC health plan participants and beneficiaries, which might number tens of thousands.
Long-Term Prospects Remain Bright
Rate Cut Signal: The Fed signaled a rate cut beginning September. This will turn out to be favorable for banking stocks reeling under high funding costs, including WFC. While high rates have led to a significant jump in NII, they have driven up funding and deposit costs, thus squeezing banks’ margins.
Considering the subdued loan demand and other factors like interest rates, asset repricing, competitive market conditions and the broader economic environment, the company expects full-year 2024 NII to be in the upper half of the range of a decline of 7-9% from 2023 levels or to be down 8-9%.
Management stated that if the Fed were to start cutting rates later this year, deposit pricing would begin to decline, with the most immediate impact from new promotional rates in its consumer business and standard pricing for commercial deposits, where pricing moves faster as rates increase.
Diverse Revenue Streams: WFC is diverging revenue sources and reducing its reliance on NII. It has been methodically strengthening its corporate investment bank as it sees significant growth opportunities.
WFC significantly raised advisor retention in its wealth and investment management division and has put more emphasis on serving its consumer banking clients and independent advisers, both of which should eventually spur development. The company's goals in the Commercial Bank division are to expand its treasury management business and provide clients with its investment banking and market capabilities.
Impressive Capital Distribution: Wells Fargo rewards its shareholders handsomely. In July 2024, it received approval to raise its dividend by 14.3% to 40 cents per share beginning the third quarter of 2024. The company also has a share repurchase program in place. In July 2023, its board of directors authorized a new share repurchase program worth $30 billion. As of Jun 30, 2024, the company had the remaining $14.7 billion worth of common stock to repurchase. Management expects to slow the pace of repurchasing activity in the short term until it receives clarity on the Basel 3 end-game. This will allow the bank to retain more capital amid the uncertain macroeconomic environment.
The company has a strong liquidity position, with a liquidity coverage ratio of 126% as of second-quarter 2024. As of Jun 30, 2024, its liquid assets (including cash and due from banks and interest-earning deposits with banks) totaled $232.0 billion.
Earnings Estimate Trajectory
Analysts seem to be neutral about Wells Fargo's prospects. Over the past seven days, the Zacks Consensus Estimate for 2024 and 2025 earnings has remained unchanged.
Estimate Revision Trend
Trading at A Discount
From a valuation standpoint, Wells Fargo appears somewhat inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 10.56X, below the industry average of 11.52X.
The stock is significantly cheaper than its peer, BAC’s current forward 12-month P/E of 11.31X. WFC is trading at a premium to C’s current forward 12-month P/E of 9.31X.
Final Thoughts
While WFC's recent price drop seems promising, caution is warranted for prospective investors. While the bank’s long-term prospects remain intact, near-term challenges are a concern.
With an asset cap in place, WFC’s loan balance is not likely to improve much, hindering its growth potential.
The company’s performance in the future will be greatly influenced by the Fed’s interest rate change decision in the upcoming months. Also, its ongoing legal scrutiny is a matter of concern. Considering these, we conclude that investors should keep a close eye on these issues before taking any investment decision.
Those who already own the WFC stock in their portfolio can retain it as it is less likely to disappoint over the long term, given its strong fundamentals. It carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.