The Wells Fargo Tower in Portland, Oregon. Image credit: Barry Caruth via Flickr.
With bank stocks falling sharply, there are three things that current and prospective investors in Wells Fargo (WFC +0.66%) should take note of.
1. It earns a lot of money
Wells Fargo earned $5.7 billion in the fourth quarter of last year. No other bank even came close. The runner-up, JPMorgan Chase, generated $5.4 billion in net income the same quarter. This is despite the fact that JPMorgan Chase's balance sheet is 31% larger than Wells Fargo's.
Data source: Wells Fargo and JPMorgan Chase's 4Q15 earnings releases.
Profitability like this not only rewards shareholders, it also acts as a buffer against losses that could materialize in a recession. Consequently, even if analysts' fears of a slowdown in economic activity come to fruition, Wells Fargo is more than adequately insulated from harm. If anything, in fact, a downturn will only position Wells Fargo to continue to gain market share against the likes of JPMorgan Chase and Bank of America, as it has since the onset of the financial crisis in 2008.
2. It has plenty of excess capital
Banks, by their nature, are highly leveraged institutions, with the typical bank having $10 in assets for every $1 or so in capital. This is one of the reasons why obsessive risk management, like that at Wells Fargo, is so critical for banks. It's also why a bank should always keep extra capital socked away to absorb unexpected losses without jeopardizing its solvency.
Wells Fargo is all over this. At the end of last year, it held $142.5 billion in Tier 1 common capital. This is the filet mignon of capital, because it excludes intangible assets and preferred stock. By contrast, Wells Fargo is only required to hold $120.1 billion in Tier 1 common capital to be considered well capitalized by regulators. Consequently, even if Wells Fargo were to lose $22 billion -- which is a highly unlikely scenario based on its history of prudent risk management -- it'd still pass regulatory muster.
Data source: Wells Fargo's 4Q15 earnings release (page 35) and 3Q15 10-Q (page 58).
3. Buys back lots of stock
Finally, while low stock prices may seem bad for shareholders of Wells Fargo, the reality is that a temporary downturn will work in their long-term favor. This follows from the fact that the California-based bank buys back a substantial amount of its own stock each quarter. The lower the price at which it can do so, the better it is for shareholders.
Wells Fargo has repurchased an average of just less than $2.2 billion worth of common stock a quarter during the past year. At its peak stock price in 2015, that equates to 37.4 million shares. But at its current stock price, which is roughly 20% lower, that equates to 47.4 million shares. Holding all else equal, in turn, a temporarily lower stock price accelerates the concentration of long-term investors' holdings in the nation's third biggest bank by assets.
In sum, while no one likes a recession or stock market correction, investors in Wells Fargo needn't worry that either or both of these possibilities will in any way impair the $1.7 trillion bank.
