Wells Fargo (WFC -2.05%) took its time when it came to restarting share repurchases, which had been on pause since the second quarter of 2022. But that changed in a big way in the first quarter of 2023, when the bank conducted a sizable buyback while also building capital in the quarter.
The move is great news for shareholders, and Wells Fargo now looks well-positioned to return significant capital to shareholders this year, despite the uncertain environment. Here's why.
A large buyback in Q1
In the first quarter, Wells Fargo repurchased $4 billion of stock. With the bank's market cap currently around $158 billion, that amounts to about 2.5% of the entire market cap.
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Furthermore, it was a far larger buyback than what JPMorgan Chase (JPM -1.36%) and Bank of America (BAC -3.92%) did in Q1, with JPMorgan repurchasing $1.9 billion of stock and Bank of America repurchasing $2.2 billion. While Wells Fargo did drag its feet on resuming share repurchases last year, I believe that it likely had to do with the fact that the bank was preparing for sizable regulatory charges related to historical matters, which did end up materializing.
But now Wells Fargo looks well-positioned to keep buying back shares this year, despite the uncertainty. In Q1, the bank grew its common equity tier 1 (CET1) capital ratio, which looks at a bank's core capital expressed as a percentage of its risk-weighted assets, from 10.6% to 10.8%. The bank's regulatory requirement for its CET1 ratio is 9.2%, so it now has a very healthy buffer to return capital to shareholders, especially with the bank's improving earnings power.
On its quarterly earnings call, JPMorgan's CEO Jamie Dimon didn't provide a ton of clarity on what the path for share repurchases would look like moving forward this year. Bank of America's CEO Brian Moynihan said the bank would continue to do them. But both seemed somewhat concerned about upcoming annual Federal Reserve stress testing results, which affect capital requirements. When analysts asked the question, I definitely liked what Wells Fargo CEO Charlie Scharf said a whole lot better:
We do feel like we have the ability to continue to return capital to shareholders while we still have plenty of flexibility to deal with anything which could come our way. And so, our excess above the regulatory minimums plus buffers is extremely high beyond what we feel that it needs to be. So we think we can continue to address that and still be very prudent with how we manage capital.
It's a good time to be buying
Based on my calculations, Wells Fargo had close to $20 billion of excess capital over its regulatory requirement at the end of Q1.
The bank also just grew profits by 32% year over year and continued to build capital while repurchasing $4 billion of stock. Management also doesn't seem overly concerned about upcoming stress testing. All this suggests that there could be much more in share repurchases to come this year.
Wells Fargo is currently trading at 127% to its tangible book value or net worth. Dating back to the Great Recession, it has only traded this cheap during the very early months of the pandemic, so this is definitely an opportune entry point.
