Wells Fargo & Co. (WFC) is one of the nation’s largest banks; the stock, one of our Top Picks for 2021, has risen over 50% since the start of the year, notes Bruce Kaser, editor of Cabot Turnaround Letter.
Under its previously weak leadership, the company never fully recovered from the 2009 financial crisis and its loose compliance culture led to a fake accounts scandal and other reputation-tarnishing problems.
Also, like all banks, it is struggling with low interest rates and limited loan growth, although the much-feared pandemic-related loan losses no longer look likely.
An additional constraint is a regulator-imposed cap on Wells Fargo’s asset size. Under new and highly-credible CEO Charles Scharf, the former head of Bank of New York Mellon and a former protégé of JPMorgan’s Jamie Dimon, the bank is aggressively restructuring its operations, cost structure and regulatory compliance.
We continue to see early indications of a tighter compliance culture, better strategic focus and more efficient operations. Scharf is reorganizing the bank’s segments to boost transparency and push accountability deeper into the business.
He is also offloading unproductive businesses including Asset Management, Corporate Trust Services, student lending and rail car leasing. Expenses appear to be restrained.
The bank is upgrading its automation and digitization of its activities while closing branches and tightening its risk controls – all of which should reduce its costs over time.
First-quarter results were encouraging. However, like all banks, lending volumes remain weak, which will weigh on the net interest margin. Capital markets revenues should remain reasonably robust.
Wells Fargo’s capital strength is healthy and improving, such that the bank recently purchased $600 million of its shares. Wells looks capable of increasing its dividend next year. We remain only modestly positive on WFC shares, as much of the turnaround has already been discounted by the 1.3x tangible book value multiple.
