Like several other large banks, Wells Fargo (WFC -0.50%) has made no share repurchases lately. The bank didn't repurchase any stock in the second or third quarters of the year, and it doesn't look like it's planning to repurchase any stock for the remainder of the year, either.
"We will continue to be prudent regarding the amount and timing of any share repurchases," Wells Fargo's CFO Mike Santomassimo explained on the bank's earnings call last Friday.
However, unlike a lot of its peers, Wells Fargo actually has the firepower to conduct share repurchases if it wants to because it has plenty of capital. Let's take a look at why the bank continues to remain cautious.
A great capital position
Banks operate under strict capital rules and must at all times hold a certain amount of regulatory capital to be prepared for unexpected loan losses and shocks to the economy. Regulators require banks to maintain many different capital ratios, but a key one they watch is called the Common Equity Tier 1 (CET1) capital ratio, which essentially measures a bank's core capital expressed as a percentage of its risk-weighted assets such as loans.
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Regulators each year set a required CET1 ratio for each bank and then management teams usually like to keep a little buffer above that. Banks can then use excess capital above their CET1 target to distribute dividends and conduct share repurchases. CET1 capital is replenished by a bank's earnings.
At the end of the third quarter, Wells Fargo had a CET1 ratio of 10.3%. Its regulatory requirement is currently 9.1% but will soon rise to 9.2%. This is an enviable spot to be in because competitors of Wells Fargo like JPMorgan Chase and Citigroup are in a position where they need to build capital to prepare for higher regulatory capital requirements in 2023 and 2024.
Wells Fargo also seems to be in a place where it has solid earnings power that should improve heading into next year. The bank just generated a $3.5 billion profit, despite having to take a $2 billion charge related to accruals for past regulatory issues such as the phony-accounts scandal.
When questioned about the potential for share repurchases on the call, Santomassimo and CEO Charlie Scharf said that the bank is being prudent right now.
"Even if you think about the third quarter and look at the rate volatility we saw in the last three weeks of the quarter, and even in the last number of days of the fourth quarter now in the beginning, we've seen quite a bit of volatility happening," Santomassimo said.
A little bit disappointing
Given the volatility in the markets and the bleak economic outlook, I can certainly appreciate management wanting to take a very conservative approach, especially when you consider the bank's past struggles. It certainly can't afford another big mistake like the phony-accounts scandal, which it is still dealing with the ramifications of.
And yet the ability to conduct share repurchases offers Wells Fargo an opportunity to separate itself from its peers right now, potentially giving it a chance to broaden its investor base. JPMorgan and Citigroup likely won't be in a position to buy back stock until 2023. Furthermore, there were times over the last six months when the bank traded at a much lower valuation, and share repurchases can be much more attractive when done at lower valuations.
Whether shares are repurchased is not the end-all-be-all for whether to invest, and I still like the stock right now for other reasons like its progress with efficiency initiatives, strong capital position, and surging loan and bond revenue.
Still, I thought Wells Fargo had some room to do share repurchases and provide some enhanced value to shareholders during a difficult time.
