What happened
Shares of Wells Fargo (WFC 5.70%) fell by more than 20% between Feb. 28 and March 31, according to data provided by S&P Global Market Intelligence. The stock fell along with the rest of the banking sector after the collapse of several U.S. banks and the forced acquisition of Credit Suisse to prevent that bank from failing as well.
So what
The main factors that brought down several U.S. banks in March are that they had lots of uninsured deposits and lots of unrealized losses in their bond portfolios that would destroy a lot of shareholder equity if the bonds had to be sold to cover deposit outflows. So, when taking a look at banks right now, it's a good idea to check out these two metrics.
At the end of 2022, Wells Fargo had about $41.5 billion of unrealized losses that had not yet been accounted for in its equity calculation. The bank's tangible common equity at the end of last year stood at nearly $134 billion, so while the sale of the bonds would certainly be devastating, the bank would likely be able to weather the storm.
NYSE: WFC
Key Data Points
That said, I find it quite unlikely that Wells Fargo would ever find itself in such a position. Unlike the banks that failed, Wells Fargo has an extremely diverse deposit base that reaches most parts of the U.S. and banks a wide range of consumers and businesses in different industries.
Additionally, after these bank failures, investors are now doing a full autopsy of bank balance sheets and looking for other lurking issues. Wells Fargo has one of the largest commercial real estate portfolios among its peer group, and many investors worry about rising loan losses in this portfolio as credit conditions normalize, especially among office and retail loans.
What now
While Wells Fargo is sitting on unrealized loan losses, I believe a deposit run is quite unlikely and also that the bank is too big to fail. Larger banks like Wells Fargo may end up benefiting from this recent banking crisis because they are being viewed as a safe refuge.
I also think CEO Charlie Scharf has done a good job of transitioning the bank. After the sell-off, this looks like a compelling entry point, and the stock should do even better if it can ever break free of some of its current regulatory issues.
While commercial real estate is concerning, I don't believe problems in this portfolio would ever bring down the bank, not that they wouldn't impact earnings.
