The financial sector has been one of the best-performing parts of the stock market this year, with most big banks handily outperforming the S&P 500. But it might surprise you to learn that the best performing big U.S. bank is none other than Wells Fargo (NYSE:WFC), which has delivered stronger performance than its peer group by a wide margin so far this year. In this Fool Live video clip, recorded on July 19, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the bank's recent results, the strong performance, and whether there could be more upside potential for the rest of 2021 and beyond.
Jason Moser: Let's pivot to Wells Fargo, another bank that you follow closely. I'll remind listeners that this is the bank that you tapped at the beginning of the year for your financials stock of the year, and so far that's working out very well for you as I watch this thing continue to creep upward. It's not without its challenges. They still haven't had that asset cap lifted yet, Matt. I think that's coming sooner rather than later. But it seem like it was a pretty good quarter all the way around, and followed some of those common threads we've been talking about.
Matthew Frankel: With that asset cap, we mentioned that other banks had their deposits up 10%, even over 20% year over year. Wells Fargo didn't. Their deposit base is only up 4%, and a lot of that is because they're not allowed to grow. So if they take in more assets than they are allowed to, they have to get rid of it somewhere else. But they are the top-performing bank stock year-to-date, if only someone had suggested them.
Moser: You hear that folks, that's Matt tapping himself on the back.
Frankel: The financials show is looking pretty good, normally it's the tech show that's the star of Industry Focus. 2020, 2019, it was all the tech stocks going crazy. Now it us, it's our turn. Wells Fargo, their quarter look pretty good. Revenue and earnings both beat expectations. They released $1.6 billion in reserves. Revenue grew 10% year over year, which, given their asset cap, is pretty impressive. Net interest margin is better than most of their peers. It still did not live up to expectations, but I mentioned Bank of America's was 1.61%. Wells Fargo's a little over 2%, so their profit margin looks pretty good. They said that loan demand is not doing too great, and with the loan portfolio down 12% year over year, it's easy to see why they would say that. But just the fundamentals of the business are looking so much better than they were even a couple of years ago. Return on equity is almost 40% in this quarter, which, remember double digits is good. Last year it was negative 10.2%.
Moser: I was going to say the efficiency ratio seems like it's coming back around.
Frankel: Yeah, they were expecting about 76%, which to put it in context, JPMorgan's is 56%, which is a good number.
Moser: Wells' was 80% just a year ago.
Frankel: Yeah, now they're at 66%, and lower is better with efficiency ratio, so we want it in the 50s. But it's getting there, it's getting toward where it needs to be. It's becoming profitable; they recently doubled the dividend. Remember, they had to cut the dividend at the start of the pandemic. So it's not quite back to where it was, but all things are looking good. We need the Fed's asset cap to be released. I don't know what the Fed is waiting on for that. It seems like Wells Fargo has made all the right moves, if you ask me.
Moser: Yeah, it does. It does feel like they're developing this track record of just consistency, and that I think to me, and I know we've talked about this before, but I just want to reiterate. You can offer up your two cents here, but it just feels like it was so key for them to bring in an outsider in Charlie Scharf as the new CEO. They made a mistake the first time around, keeping an insider when all of those culture issues were really coming to the surface. Just to me, it really does show the value in bringing in that outside set of eyes that can take a bit more of an objective look and not feel so tied to just legacy constructs of how that business was running itself from before.
Frankel: Yeah, I would agree. I think they're making all the right moves. Remember, we talked last week about them cutting the personal lines of credit. They could have done a better job at handling that.
Moser: That was a little bit of a fail.
Frankel: I'm sure that didn't make regulators happy.
Frankel: It looks like they're doing pretty good. They've improved their culture. Like you said, they brought in some outsiders. I would have thought it would have happened by now.
Moser: Maybe that's a headline here, the back half of the year that just keeps this thing going in the right direction. I don't know, maybe we go back to the beginning of the year.