Wells Fargo: Is This Banking Giant a Good Long-Term Bet?
July 30 2021 - 7:29AM
Finscreener.org
Banking and large-cap financial stocks can
make for great long-term investments. In terms of risk, banking
stocks fall in the middle of the spectrum, not too risky but not
exactly risk-averse. There are certain inherent advantages of
investing in banking stocks such as heavy regulation that ensures
earnings stability, as well as high-profit investment banking
services, and medium long-term risk.
However, the COVID-19 pandemic was not kind
to the banking sector. Overall, the banking sector lost 1.7%% in
market value in 2020. When compared to the overall gain of 18% of
the S&P
500, it puts into perspective how much the banking sector
underperformed.
Thanks to the overall market reopening’s and
recovery, the banking sector is expected to return to pre-pandemic
levels soon. Even though the performance of the banking companies,
similar to the overall market, cannot be predicted with any degree
of certainty, we can still make some educated
guesses.
One of the most promising stocks in this
sector currently, is Wells Fargo (NYSE: WFC).
In this article, we’ll discuss four major reasons why Wells Fargo
can make a good choice for long-term
investment.
May Beat Inflation
Long-Term
Banks make for great investments if the goal
is to beat inflation, and Wells Fargo is particularly positioned to
beat rising prices. The primary reason why banks do well against
inflation is that they outperform during periods of higher prices,
unlike most other sectors.
Wells Fargo is more focused on commercial
banking and consumers when compared to the other large American
banks. Hence, most of Wells Fargo’s revenues come from loan
repayments and wealth management. In such a scenario, when the
Federal Reserve increases its interest rate, Wells Fargo’s lending
rate will also increase.
Since Wells Fargo’s revenue is more tied to
interest rates compared to other banks, their revenues will rise by
a higher percentage during times of high inflation when compared to
peers.
Has High Reserves to be Released into
Earnings
During the pandemic, every major bank started
building up its reserves in an effort to combat future uncertainty.
These reserves were meant to be an insurance against high
incidences of loan losses that would happen in a faltering
economy.
However, the worst did not come to pass. The
American economy is showing strong signs of recovery from the
effects of the coronavirus pandemic.
Most banks are now releasing their reserves
back into their quarterly earnings. The difference is that Wells
Fargo is doing the same but at a much slower rate. Hence, it still
has plenty of reserves to be released into future earnings which
will support bottom-line growth. This may act as a support for
stock prices over the long term.
On Track To Remove Asset
Cap
In 2018, Wells Fargo was hit with a scandal.
The company had been opening credit card and depository accounts
for its customers without their authorization. In retaliation,
federal regulators slapped an asset cap of $1.95 trillion on the
bank. This meant that the bank could not grow at a rate akin to its
peers.
Now, fast-forward to 2021, the bank is on
track to
have this cap removed. The bank has overhauled its leadership
team and is doing everything it can to make good with the
regulators and have the asset-cap removed.
High Potential Value
Play
Wells Fargo is currently a value stock,
trading at just approximately 130% of its tangible book value. The
primary reason behind Wells Fargo’s low valuation is the regulatory
asset cap that was slapped on the bank after the 2018 unauthorized
accounts scandal.
What Wells Fargo needs is a good turnaround
story, which it seems to have. The company has been working on
overhauling its cost and expense structure which could mean
significantly higher profitability, apart from a new leadership
team as mentioned earlier.
Over the long term, Wells Fargo can make a
good value play as the bank recovers from its erring ways.
Wrap Up
In short, currently, Wells Fargo makes for a
good potential long-term investment. The bank has many things going
for it, which is indicated by the approximately 50% rise in share
prices in the first half of 2021.
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