Over the past six months, Wells Fargo’s shares (currently trading at $80.54) have posted a disappointing 7.3% loss, well below the S&P 500’s 3.9% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Wells Fargo, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Wells Fargo Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Wells Fargo. Here are three reasons we avoid WFC and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Net interest income commands greater market attention due to its reliability and consistency, whereas one-time fees are often seen as lower-quality revenue that lacks the same dependable characteristics.
Wells Fargo’s net interest income has grown at a 5.1% annualized rate over the last five years, much worse than the broader banking industry.
2. Net Interest Margin Dropping
Net interest margin (NIM) represents the unit economics of a bank by measuring the profitability of its interest-bearing assets relative to its interest-bearing liabilities. It's a fundamental metric that investors use to assess lending premiums and returns.
Over the past two years, Wells Fargo’s net interest margin averaged 2.6%. Its margin also contracted by 38.7 basis points (100 basis points = 1 percentage point) over that period.
This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean that Wells Fargo either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.
3. Projected TBVPS Growth Is Slim
Tangible book value per share (TBVPS) growth is driven by a bank’s ability to earn more than its cost of capital through lending activities while maintaining a strong balance sheet.
Over the next 12 months, Consensus estimates call for Wells Fargo’s TBVPS to grow by 5.9% to $47.70, lousy growth rate.
Final Judgment
Wells Fargo isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 1.4× forward P/B (or $80.54 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.
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