Over the past year, Wells Fargo (WFC 0.69%) has been one of the few big bank stocks to underperform the market. But does this make shares of the nation's third-biggest bank by assets a buy? Not necessarily.
Wells Fargo's shares have climbed 3% since this time last year. The S&P 500, by contrast, is up 16% in the same stretch. This makes Wells Fargo an outlier among big bank stocks. The KBW Bank Index, which tracks two dozen large-cap bank stocks, has risen 29% since June 2016. And some banks, like Bank of America, are up even more. Shares of the Charlotte, North Carolina-based bank have surged 55%.
Wells Fargo's underperformance traces back to its fake-account scandal, in which thousands of branch employees created millions of fake customer accounts in an effort to meet their sales targets and therefore keep their jobs. The scandal erupted into public view last September, but had been going on at the bank for a decade, if not longer.
It seemed at first as if the Wells Fargo scandal would just blow over. Sure, it was fined $185 million from a combination of federal and state agencies, but that equates to only around 3% of its quarterly earnings. The expected impact was so small, in fact, that the bank's now-former CEO John Stumpf didn't even believe it was material, which would have triggered the bank's duty to have previously disclosed the festering scandal to shareholders.
In the time since then, however, it's become clear that the damage will be much more meaningful and longer lasting than Wells Fargo initially believed. This follows from the fact that the bank has now abandoned its former cross-selling strategy by eliminating sales goals in its branches, which has triggered a drop in new account openings at Wells Fargo, with new checking accounts down 35% in March on a year-over-year basis.
Image source: The Motley Fool.
This shouldn't hurt Wells Fargo too much in the short run, as new checking accounts tend to be loss leaders for banks. The objective, and especially at Wells Fargo, which has long referred to its branches as stores, is to cross-sell more profitable financial products to these customers once their proverbial feet are in the door. Fewer new accounts being opened today, then, holding all else equal, will be felt much more in the future, when there will be fewer new customers to cross-sell products to, thereby weighing on growth.
On top of this, Wells Fargo is facing a considerable amount of collateral damage from the scandal. It paid $142 million to settle a class action brought by customers, and it's still making its way through other private lawsuits as well as government investigations related to the opening of fake accounts. The net result is that Wells Fargo will be facing elevated legal expenses for the foreseeable future.
And while Wells Fargo's stock certainly isn't expensive, trading at a 45% premium to its book value per share, which is right in line with its peer group, it also isn't as cheap as the likes of Bank of America and others, which trade for discounts to book value.
The net result is that Wells Fargo, of all the big bank stocks right now, is swimming against the current. It will one day (hopefully) reclaim its sterling reputation, but until then, there are better bank stocks to add to one's portfolio.
