Trust is vital in the financial sector, and companies will go to great lengths to prove that investors can comfortably give them money. Wells Fargo (WFC -0.03%) breached that trust not too long ago, and despite its still-large size, it continues to work toward proving that customers and investors can trust it again. The stock's performance is a sign that there's still more work to be done.
Tiny returns
If you had invested $1,000 in Wells Fargo stock a decade ago, it would be worth... $1,011 today. That's right, after a whole decade, all you'd have to show for it would be a paper gain of $11. If you reinvested your dividends over that entire span, which is total return, that $1,000 would have grown to $1,345. Given the stock-only increase of just $11, most of the difference between stock return and total return is simply the actual dollar value of the dividends collected over that time. The magic of compounding wasn't a big factor.
That is not a particularly impressive showing. To be fair, the entire banking sector is out of favor right now thanks to the bank runs that have been taking place. Although the biggest risks here appear to be at smaller and mid-size banks, like First Republic (FRCB), the core problem is not unique to such banks.
The concerns center around a bank's balance sheet. This is a pretty complex issue, but to give a high-level view, rising interest rates have reduced the value of bond investments that banks expected to hold until maturity. When too many customers pulled money from the banks, they were forced to sell those bonds, leading to a loss on the investment. This also meant a reduction in the safety of the banks, since the money they said they had in case of withdrawals really wasn't there.
Image source: Getty Images.
There's a very real concern that more banks could go down this spiral. Wells Fargo, for example, transferred $59.4 billion from the category known as available-for-sale, where valuations change along with market conditions, to held-to-maturity, where assets are held at face value, according to The Wall Street Journal.
The main goal of this shift appears to have been to avoid marking down the value of the bonds so the bank would look stronger, financially speaking. If Wells Fargo had to sell those securities, The Wall Street Journal estimates it would be looking at a loss of up to 23%.
So why is this important?
The big-picture story today is that trust in the banking industry is pretty low right now, and for good reason. Wells Fargo is getting hit along with many of its peers, several of which have done the same thing with their balance sheets. But for Wells Fargo, this comes on top of a history that is, well, less than appealing.
Notably, it has been under regulatory scrutiny for about a decade at this point. It all traces back to allegations concerning bank accounts that were opened without the consent of customers so the employees could increase their compensation. It is understandable that customers and investors now have trust issues with this bank.
A lot has changed since that scandal broke, including the company's business practices and top brass. However, the payments related to the company's past transgressions still linger to this day, with the bank ordered to pay a $3.7 billion fine at the tail end of 2022. That was on top of earlier, and similarly dramatic, fines.
In other words, Wells Fargo has gone nowhere for a decade because of self-inflicted wounds. The recent banking turmoil simply picks at a scab that had only just started to heal over. If you had to choose a bank to own in turbulent times, Wells Fargo probably shouldn't be at the top of your list.
As a reference point, over the past decade Bank of America has turned a $1,000 investment into $2,280 based on price only -- and $2,700 if you include dividend reinvestment. Bank of America has been something of a standout performer, but it certainly helps that it doesn't have the same baggage weighing it down as Wells Fargo.
Probably not worth owning
Investors looking for a bank stock in the face of the bank run turmoil might see the iconic Wells Fargo name and think it is worth looking at. In fact, over the past year, the stock has held up better than Bank of America's stock. But going with Wells Fargo is probably not the right call, given the bank's less than impressive history over the past decade. It would be better to err on the side of caution and pick a bank without those significant self-imposed wounds.
