Wells Fargo’s First Quarter Results – Is a Recovery Coming?

Due to the scandal involving fake accounts in the company and other current issues, Wells Fargo‘S (NYSE:WFC) Q1 earnings report was by far the worst among the four largest U.S. banks. How long will the bank continue to suffer underperformance, and will management be able to turn things around?

The full transcript is below the video.

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The video was recorded on April 16, 2018.

Michael Douglas: Let’s talk a little bit about the problem child of the bunch, Wells Fargo. It’s not such a great quarter for them.

Matt Frankel: No. And they had similar benefits, tax reform worked in their favor. But overall, Wells Fargo is not doing so well right now. A lot of investors initially thought that when they had the fake account scandal over a year and a half ago, that it would be a quick, temporary thing. And I was hoping so too. But since then, a couple of other scandals have come to light. The bank is not sure how this is going to affect its bottom line. They just made a big announcement in their earnings report that these results may not be true results, depending on the outcome of some legal issues. And on top of that, the Federal Reserve says that Wells Fargo cannot exceed its 2017-end asset level.

So from an investment thesis perspective, right now they’re not even in the same bracket as the rest of them. And you see the public distrust because of the scandals that are affecting their numbers. Their revenues have actually been down year over year. Their net interest income has been down year over year, which is really alarming in this era of rising interest rates. Their net interest margin is down three basis points. Their deposits are down. That means people are taking their money out of Wells Fargo. I mean, less than 1%, but still, at a time when everyone else is growing 3% to 5%, that’s a big deal. Their loan portfolio is down 1%. They’re definitely the least efficient of the big four banks, with an efficiency ratio of about 65%.

Douglas: Which is a huge change from the past.

Frankel: Oh yeah. Wells Fargo for, I would say, over a 10-year period, up until about 2017, was the most efficient, most profitable of the four major banks. And that’s not the case anymore. In most cases, I would even say Bank of America looks a lot better now than Wells Fargo, which would have been a crazy statement a few years ago. Nobody would have believed me if I had said that. I wouldn’t have believed me if I had said that a few years ago.

And to be fair, they fully realize that they are still in the early stages of turning the ship around. They know that they have a lot of work to do, and the new management seems very focused on getting it done, it’s just going to take a lot longer than originally thought, especially with all the mini-scandals that are coming out and the penalty that the Fed imposed, which is pretty unprecedented.

Matthew Frankel owns shares of Bank of America. Michael Douglass has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.