Wells Fargo (WFC -2.58%) continues to be a perennial underperformer among the mega-cap banks. In a week that saw most of its major competitors beat their estimates, Wells Fargo went the other way with disappointing results, and the share price reacted accordingly -- falling about 5% in a single day. Is it time for shareholders to throw in the towel, or should they stay the course?
Wells Fargo's earnings were bleak on almost every measure. Revenue fell 1.4% year over year, largely driven by an 11% drop in net interest income. Profits fell by even more -- over 50% -- due to a 17% increase in noninterest expenses. The main culprit was a $1.9 billion legal charge, highlighting the fact that Wells Fargo continues to be hindered by its involvement in prior sales scandals. More concerning was the lack of clarity around future litigation costs and other expenses over the next several quarters.
Wells Fargo continues to lag behind its peers...
Contrast these results with the other two megabanks that reported on the same day. Both JPMorgan Chase and Citigroup surpassed analyst expectations and raised revenues by 9% and 7%, respectively. Earnings per share rose double digits -- 30% at JPMorgan and 31% at Citi -- while noninterest expense growth was limited to mid-single digits. No wonder, then, that JPMorgan's and Citi's share prices rose, while Wells Fargo's fell.
Under these circumstances, an investor could be forgiven for selling the shares. However, the same investor should understand that Wells Fargo's fourth-quarter results are by nature backward-looking, as they primarily reflect the efforts of prior management, while new CEO Charles Scharf had only been on board for three months going into earnings. It is also not unusual for new management to lower the bar on results so as to steepen the trajectory of improvement on their watch.
...But change will come with a new team at the helm
Moreover, as disappointing as the company's results were, there were signs of improvement. Wells Fargo saw growth in both loans and deposits as well as a pickup in its various consumer segments such as auto loans, mortgage originations, and credit card volumes. Its investment banking market share rose 0.5%, and customer satisfaction noticeably picked up in the community banking business. These trends highlight the company's competitive strengths, which remain formidable despite what's happened over the past several years.
With Scharf at the helm, Wells Fargo should be able to coordinate more closely with regulators and work toward putting its compliance-related issues behind it. Scharf has also reinforced the ranks of senior management at the firm by bringing in key personnel such as William Daley (who served as White House chief of staff under President Barack Obama) and Scott Powell (former head of Santander Consumer USA). Although still a work in progress, Wells Fargo is setting the stage for a recovery and an end to the extended period of share price underperformance.
How long this process will take is anybody's guess. But in the meantime, investors who are interested in banks can find solace in a stock that is trading at a discount both relative to its historical range as well as its peers and sports a dividend yield in excess of 4% to boot. Far from throwing in the towel, the patient investor might want to add.