Wells Fargo shows why investors should be wary of scandal-ridden companies
A drop in stock prices in the midst of a corporate scandal can sometimes offer investors a long-term buying opportunity – but in the case of Wells fargo (NYSE: WFC), the road to redemption promises to be long and bumpy.
The banking giant continues to be haunted by its fake accounts scandal from five years ago. Unhappy with the bank’s progress in compensating victims and strengthening risk management and financial controls, regulators could add new penalties that could hamper Wells Fargo’s ongoing recovery, according to a recent report by Bloomberg News. glad.
Wells Fargo shares have fallen more than 5% on the news and continue to languish. Extending the cycle of bad news, three former senior Wells Fargo executives are set to stand trial in a public administrative law hearing on September 13 for their alleged roles in the scandal.
How much do scandals matter?
If the markets cared deeply about banking scandals, just about every major bank would be in trouble. Since the 2008 financial crisis, most have settled allegations that could make the Mafia blush.
Wells Fargo’s biggest fraud was particularly brash and baffling. Under pressure from their superiors, his employees put customers on credit accounts they didn’t even know about, ringing credit scores and racking up unauthorized charges.
The Federal Reserve has since kept the bank in a vise, imposing an asset cap that limited its ability to grow its loan portfolio. That’s why the markets always care about Wells Fargo’s transgressions. If the headlines don’t improve and regulators remain dissatisfied, this asset cap could stay in place for some time to come.
For the most part, however, the memories are short and life goes on. This is one of the reasons why the company’s stock is still worth a hold for long-term investors, even though it may face some short-term disappointments.
A healthy post-pandemic race
From its pandemic low of $ 21.76, Wells Fargo has risen to just over $ 44, even after recent news from disgruntled regulators. That’s about 33% below its all-time high of over $ 60 in 2018, leaving plenty of room for improvement.
On the plus side, the banking giant is in the middle of a quick share buyback plan that will support its stock price. It also reduces costs and improves efficiency to increase profitability. And investors can still look forward to the day the Federal Reserve raises the asset cap, clearing the runway for take-off.
What could possibly go wrong? A relatively new presidential administration could take a much tougher approach in the face of lingering Wells Fargo scandals and slow efforts to improve risk management and financial controls. This in turn could prompt the Fed to maintain its asset cap. Additionally, Wells Fargo could fail in its attempts to improve efficiency and costs, or it could fall behind on its share buyback plan. A prolonged pandemic balance sheet could also impact the bank’s profitability by keeping interest rates low and slowing the economy.
Compared to other major US banks, Wells Fargo is not a key player in the capital markets, but enjoys significant competitive advantages as the nation’s fourth largest bank. It has nearly $ 2,000 billion in client assets and operates an extensive branch network that allows it to maintain a leadership position in many of its regional markets.
Investors paid for Wells Fargo stock, encouraging its recovery. Its 12-month price-to-earnings ratio hovers around 12, compared to around 10.5 for JPMorgan Chase (NYSE: JPM) and about 7 for Citigroup (NYSE: C). Among the four largest banks, Bank of America (NYSE: BAC) has the highest valuation, around 13.5.
At these levels, it’s hard to argue that Wells Fargo is undervalued, but investors are still betting that Wells Fargo’s plans to improve efficiency, buy back stocks, and align its practices with regulators will justify its P / E more. raised.
Indeed, Wells Fargo still offers a lot of potential for long-term investors, including a dividend yield of 1.8% which could increase, given management’s propensity to support the share price through its program. redemption.
However, now might not be the time to buy. Watch out for other negative stocks that could drive the stock price down in the weeks to come. And especially watch out for any news about the Fed’s asset cap on the bank.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.