It's been nearly two years since we learned about Wells Fargo's (NYSE:WFC) fake-accounts scandal, which turned out to be the first in a series of damaging incidents to emerge.
In this clip from Industry Focus: Financials, host Shannon Jones and Fool.com contributor Matthew Frankel discuss why the scandals are still very much a part of this institution's business.
A full transcript follows the video.
This video was recorded on July 9, 2018.
Shannon Jones: Let's talk about Wells Fargo. Can you tell us more about the business and, really, the burning question that I think most investors want to know is, have they finally turned a corner?
Matt Frankel: We'll start with the business. Wells Fargo is the only one of the big four that is pretty much purely a commercial bank, as in they don't really engage in any investment banking activities. Even though they're such a big institution, their balance sheet looks like that of just a small savings-and-loan, just with much bigger numbers. They're primarily a commercial bank, and on paper, it looks pretty good. They're profitable. Return on equity is 12.3%, return on assets is 1.26%, so they're exceeding their benchmarks. Everything looks good in that respect.
But, if you've followed the financial news at all over the past couple of years, you know Wells Fargo's had some problems. They had their big fake accounts scandal, which came to light in September 2016, where it turns out they opened over three million unauthorized accounts. Over 5,000 Wells Fargo employees, to try to meet sales goals, behaved very badly. Since then, we've seen a string of, I call them mini-scandals, but they're really not that mini. They were overcharging people for mortgages, they were charging people for insurance on auto loans that really wasn't necessary. I was actually one of the people who got a notice that I was going to have to pay Wells Fargo auto insurance when I already had insurance somewhere else. It was a pain, but I cleared it up. A lot of customers just took them at their word that they needed this insurance.
Wells Fargo had a lot of bad stuff going for it. The thing that makes me say they're not out of the woods yet -- to be clear, they're doing a great job of trying to restore their image. Their annual report this year was actually called Rebuilding Trust, that was the title. You've probably seen some of the commercials -- Wells Fargo, reestablished in 2018. They're doing a great job of trying to clean up their image and make it clear to the public that their old ways are behind them.
But the thing that really keeps me from saying they've turned the corner is that the Federal Reserve slapped them with this gigantic penalty that's never been done before that says, essentially, they can't grow until they've shown substantial improvement, is how the Fed put it. First of all, what does "substantial improvement" mean? It's a very vague term. There's no clear timetable when they will be allowed to grow, when the Fed will lift that penalty. The second thing, this is a bank that's not allowed to grow at arguably the best growth environment for banks in decades.
Wells Fargo, on paper, looks like they're doing OK. Growth, they're not doing great. First quarter, their loan portfolio shrank, their deposit base shrank a little bit, revenues went down, while all the others grew in those areas. Like I said, they're not allowed to grow right now, so that probably has something to do with it.
Wells Fargo is still great asset quality. They do a great job of risk management, always have. That's why they made it through the financial crisis in such great shape, and were able to scoop up Wachovia during the financial crisis, which was a game-changer for the bank. But, they behaved very badly, they got called on it, and they're still not out of the woods.
I would need much more clarity from the Federal Reserve before I could give my endorsement to this stock, even though Warren Buffett has -- it's interesting to point out. He said it will be the best performer of the big four banks over the next decade. Take that for what it's worth. Some of us clearly disagree.
Jones: Hard to argue when the Fed taps your growth, in terms of being a real good investment opportunity. I'm with you on that. The main concern for me with Wells Fargo is -- like you brought up, Matt -- at what point is substantial improvement actually achieved in the eyes of the Fed? What does that look like? And, will Wells Fargo be able to regain the trust of its customer base enough to say that it can now comfortably grow over the long term and sustainably? Too many question marks on this stock for me. We'll have to wait and see if Buffett's words hold true.