Thanks to the company's fake-accounts scandal and other ongoing issues, Wells Fargo's (NYSE:WFC) first-quarter earnings report was easily the worst among the big four U.S. banks. How long will the bank's poor performance continue, and will management be able to turn things around?
A full transcript follows the video.
This video was recorded on April 16, 2018.
Michael Douglass: Let's, of course, talk a little bit about the problem child of the bunch, which is Wells Fargo. Not as great of a quarter for them.
Matt Frankel: No. And they had some of the same benefits, they had tax reform working in their favor. But, generally speaking, Wells Fargo is not doing that great right now. A lot of investors originally thought that when they had their big fake accounts scandal over a year and a half ago now, that that was going to be a quick, temporary thing. And I was actually hoping it would be, as well. But since then, a few other scandals have come to light. The bank is uncertain how that's going to affect their bottom line. They just put out a big statement in their earnings report that these results may not be the real results, depending on the outcome of certain legal matters. And on top of that, the Federal Reserve says Wells Fargo can't grow past their asset level at the end of 2017.
So, from an investment thesis perspective, they're not even in the same ballpark as the other ones, for the time being. And you're seeing the public distrust caused by the scandals affecting their numbers. Their revenue actually fell year over year. Their net interest income fell year over year, which is really alarming in a time of rising interest rates. Their net interest margin actually dropped by three basis points. Their deposits went down. That means people are pulling their money out of Wells Fargo. I mean, less than 1%, but still, at a time when everyone else's is going up by 3-5%, this is a big deal. Their loan portfolio dropped by 1%. They're the least efficient out of the big four banks by far with about a 65% efficiency ratio.
Douglass: Which is a big reversal from the past.
Frankel: Oh, yeah. Wells Fargo for, I would say a period of over 10 years now, up until about 2017, was the most efficient, the most profitable of the big four banks. And that's not the case anymore. In most ways, I would say even Bank of America is looking a lot better than Wells Fargo right now, which a few years ago would have been a crazy statement. No one would have believed me for saying that. I wouldn't have believed me for saying that a few years ago.
And to be fair, they recognize completely that they're 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 pretty focused on doing it, it's just going to take a lot more time than it originally looked like, especially with all the mini scandals that are coming out, and the Fed's penalty, which is pretty unprecedented.