Friday, September 23, 2016

Can an equity investor hold their nose and buy Wells Fargo now

Wells Fargo closed today flat at $45.74 after closing yesterday at $45.72.  On September 1st the stock was at $51 and had been as high as $55 in the last year.  It now has a dividend yield of 3.3% and a trailing twelve months p/e of 11.3x, well below the S&P median.  The penalty that it just received from the regulators was limited by what they were allowed to charge, and it is peanuts compared to WFC's earnings.  There is no comparison to the many giant charges related to mortgage securities that have impacted the large financial services companies in general.

With all of the attention on their fiasco and fraud related to opening phony accounts without customer knowledge, it can safely be assumed that their incentive systems will be overhauled as soon as possible.  It is also clear that they have no choice in the near term other than to make management changes.  They do have a succession plan in place and the likely person rising has had no role in the retail banking imbroglio.  It can also be assumed that a major customer outreach program is underway.

With the fines for their fraud not substantial, it now can be recognized that a huge amount of Well Fargo's business is annuity-like.  Their gargantuan mortgage business will keep seeing a flow of servicing fees and interest.  It is unlikely that a significant amount of customers will go out and refinance their mortgages with another firm.  There are costs to doing that, and the risk that Wells will scam them is reduced with government scrutiny.  The same can be said for the average banking customer.  Making changes to banking arrangements is something that most retail customers would like to avoid as it is a time consuming process that can always lead to errors in transfers to a new financial institution and requires establishing new relationships.  WFC's risk profile in the corporate and institutional market has always been low relative to investment banks, of course, and to JPM, in particular, and BAC as well.

The bad news will keep coming as Congressional hearings and Labor department investigations go on.  This is prime time for attention seeking politicians to get their mugs on the screen, indignant and probing , as if they had been seriously examining the industry in the past, or in the previous month. The bad news is presumably reflected in the new lower stock price.  It could decline somewhat more, but one could guess that the worst has mostly happened from a stock price point of view.

It's an investment to think about.  It is not an endorsement of the firm's behavior, but a chance to buy a substantial firm that has many positive attributes and leading market positions at what could be a reasonable price, with a good yield, and meaningful upside if the Fed ever has the guts to raise rates.

Postscript:   Wells Fargo has been well known as a bank with a history of good management.  There had,in my heyday, never been a hint of arrogance from this firm, from its senior to middle management seen from day to day into the 80's and beyond.  Culture sustains itself, and this aberration will be overcome.  As more comes out, any challenge will become more clear.


Anonymous Anonymous said...

Kick out the CEO, pay a fine, change a compensation rules, and the stock will jump.

11:19 AM  

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