Wells Fargo (WFC 0.89%) has outperformed all of the major banks this year, with its stock price down only about 4% year to date. In comparison, its major competitors have all posted double-digit drops this year. Its valuation has also come way down with a forward price-to-earnings (P/E) ratio of 9, and a minuscule five-year P/E-to-growth (PEG) ratio of 0.19. Both are indicators of an undervalued stock.
With its solid revenue gains in the most recent quarter and improving credit quality, it has been a nice safe haven for investors in this market. While it looks attractive and appears to be a solid buy, there is one major reason why I would look elsewhere if I were to add a bank stock to my portfolio right now.
The one thing
The primary reason that Wells Fargo is performing better than its mega-bank peers is that its revenue is more reliant on consumer banking than the others, like JPMorgan Chase, Bank of America, and Citigroup. In the most recent quarter, Wells Fargo generated roughly 48% of its revenue from its consumer banking and lending arm -- about $9.3 billion of its $19.5 billion in quarterly revenue.
WFC Revenue (Quarterly) data by YCharts
That was the highest percentage -- nearly half its overall revenue, by a considerable margin among the big four. In addition, it had the lowest percentage of revenue from its investment banking business. Specifically, Wells Fargo made about $4 billion of its revenue from corporate and investment banking, which is roughly 20%.
This is an ideal mix in this type of environment, where investment banking activity has dropped precipitously in the first three quarters of the year, given the slowing economy, high inflation and interest rates, and the bear market. At the same time, consumer banking has been the strongest business line for banks, as rising interest rates have boosted interest income and loan activity has remained steady. On the flip side, banks with lower percentages of consumer banking revenue and larger investment banking businesses are going to struggle right now.
Bolstering investment banking
One of the goals laid out by Wells Fargo Chief Executive Officer Charlie Scharf and his team shortly after he took over in 2019 was to expand the investment banking business to close the gap with its competitors. More recently, Scharf cited a $1 billion opportunity in increasing its investment banking revenue just with its existing commercial banking clients.
"We've looked at our own customer base, and...how much those customers pay the Street," Scharf said at a conference in June hosted by AB Bernstein. "It's huge -- like $4 billion to $5 billion or something. And you look at what we get paid, and it's teeny. These are folks that we're already taking the financing risk on. We know them intimately. It's a $1 billion opportunity just with our own customers."
It's one of the reasons that JPMorgan Chase and Bank of America, in particular, have outperformed Wells Fargo over the past decade. Wells Fargo has returned just 3.2% over the past 10 years as of Nov. 7, while Bank of America has an annualized return of 14% and JPMorgan has an annualized return of 11.8% over that same period. It hasn't helped that Wells Fargo has had its share of scandals, risk management issues and regulatory penalties over the years.
So, the opportunity is there for Wells Fargo, and the bank is moving in the right direction. And given the current but surely temporary state of the market, Wells Fargo should continue to outperform its peers. However, as a long-term investor, I see more value with the larger, more well-rounded banks -- JPMorgan Chase and Bank of America -- which should surge once the market turns and mergers and acquisitions activity picks back up.
