Is Wells Fargo Worth Investing in?

To determine if Wells Fargo worth investing in, an understanding of the big four banks in the U.S. Below are the top four:

  • JPMorgan Chase & Co (JPM) – $2.69 trillion
  • Bank of America Corp (BAC) – $2.03 trillion
  • Wells Fargo & Co (WFC) – $1.76 trillion
  • Citigroup Inc. (C) – $1.63 trillion

While JPM had an amazing quarter, not all banks fared as well. This post will review how Wells Fargo & Co is doing.

Wells Fargo Q2 2020 Review

Wells Fargo is trading down 46% from just a year ago and has some reputation issues to work through. WFC is the oldest operating bank in the U.S.

With it trading down below its 50-day & 200-day moving averages, is it time to invest? With the dividend already cut, this could be the bottom but now a deeper dive into WFC.

Q2 2020 Earnings

Wells Fargo had a net loss in Q2 of $2.3 billion, which resulted in a loss of $.66 per share. The biggest driver of this loss was the provisional expense which WFC added $9.5 billion to allow for $8.4 billion credit losses and $1.1 billion for net charge-offs on loans. The $9.5 billion is on top of the $4 billion that WFC had put aside in Q1 2020.

Wells Fargo Worth Investing in

WFC makes the majority of its money from loans and deposits and does not have a substantial trading group. Competitor JPM was able to have record profits due to its trading division based on all the volatility. Unfortunately, WFC cannot lean on the trading division like JPM to profit.

WFC experienced declines year over year in its consumer Real Restate, Credit Card, and other revolving credit. The positives were from auto loans in the consumer sector and commercial mortgages.  Commercial loans were up $942 million years over year.

The chart below shows net interest income has decreased $2.2 billion or 18% year over year as a result of the lower interest rate environment.

Wells Fargo Worth Investing in

The net charge off rate is up, which is expected, but it can be seen that WFC is building a war chest to help protect against a large number of defaults. There has not been an uptick in foreclosures yet, but non-accrual loans are up.  Non-accrual loans are loans that are 90 days or more overdue and are not producing interest for the lender any longer.

Wells Fargo Worth Investing in

Wells Fargo Dividend Cut

Wells Fargo cut its dividend by an astonishing 85%! This cut will save the bank about $5 billion a year.  WFC cut the dividend to get an additional $1.5 billion this quarter to boost its ability to meet the regulatory minimum. 

Wells Fargo Worth Investing in

Wells Fargo Scandals

To give perspective as to some of the scandals and issues WFC has had in the past few years. Check out the list below, unfortunately for WFC it is quite a long list:

  • September 2016 – Fake account scandal that resulted in the creation of million fake deposit accounts and an additional 500,000 phony credit cards. As a result, WFC had the following occur
    • A $185 million fine from regulators
    • The former CEO has $41 million in compensation removed
    • 5,300 low-level employees filed for creating accounts under pressure
    • A $142 million in a class-action suit.
  • September 2016 – Illegally repossessed Military members’ cars
    • DOJ – fined WFC $20 million
    • Restitutions to military members totaled an additional $10 million
  • December 2016- Failed its “living will” test
    • WFC got slapped by US regulators with restrictions on its size after failing a living will test, which is a big bank requirement to illustrate how they would operate in the event of a bankruptcy.
  • March 2017 – Fake accounts …again. This time around, WFC created 3.5 million fake accounts.
  • April 2017 – WFC had to pay a whistleblower $5.4 million because WFC fired him in 2010 for reporting potential fraud.
  • August 2017 – A lawsuit was filed against WFC, alleging that WFC overcharged small business retailers for credit card services with massive termination feeds to force them to say in the contacts.
  • February 2018 – The Federal Reserve announced that it would restrict the bank’s growth.
  • February 2018 – The city of Sacramento sued WFC for discriminating against black and Latino borrowers.
  • March 2018 – News breaks of a DOJ investigation into WFC’s wealth management business on if the bank provided unsuitable recommendations and referrals.
  • April 2018 – WFC paid a $1 billion settlement for improperly charging Mortgage and auto-loan borrowers.
  • May 2018 – Settled a securities fraud lawsuit to the tune of $480 million.
  • June 2018 – The SEC fined WFC $4 million and also required the bank to pay $1 million back to investors.
  • August 2018 – WFC agreed to pay $2.1 billion for its role in the housing bubble that lead to the Great Recession.
  • August 2018 – Due to some technical difficulties, WFC accidentally foreclosed on hundreds of homeowners. The glitch resulted in WFC paying $8 million to fix 625 people’s situations.
  • March 2019 – WFC was one of 79 firms that the SEC sanctioned for selling more expensive mutual funds to clients that resulted in higher fees for the advisors.

 Federal Restrictions

As a result of the consumer abuses and other compliance issues by Wells Fargo, the Federal Reserve Board would limit the growth of the bank until it improves the company’s controls and governance. The Fed enforced the following ruling:

  • Replaced four board members in 2020
  • Asset cap of $1.95 trillion for two years

The cap does not limit a particular activity of the bank but instead Wells Fargo balance sheet. Recently, the Fed has allowed WFC to grow its lending through the SBA program & Main Street Lending Program without counting against its $1.95 trillion cap.


WFC has been trying to rebrand after all the scandals. In 2017 Wells Fargo unsuccessfully launched an apology campaign that was “Building a Better Bank.” Most Unfortunate WFC launched an apology campaign right before another year of scandals, which destroys the campaign.

Wells Fargo: Re-Established 2018 from BBDO San Francisco on Vimeo.

Then in 2018, it came out with a new campaign of “Established 1852. Re-established, 2018.” The new campaign was slightly more successful than the previous campaign but make no mistake that WFC is a battered brand still. 


WFC performed an extensive search for a robust and experienced leader to help drive the bank out of scandals and regain its former glory. The bank chose Charles Scharf, who is an experienced CEO coming from Visa and BNY Mellon, where we were the CEO. Additionally, He was also a director on the board of Microsoft.

Most have praised WFC for this choice as he is a successful banker who has successfully lead multiple financial companies and should be able to lead WFC back into the Federal Reserve’s good graces.

WFC Efficiency

During the fall out from the Great Recession, the other big banks realized they were not as efficient as required to survive a low-interest-rate environment. WFC has increased its employee base in the past year. This is alarming that WFC has the most extensive employee base among the big banks, even though it has the smallest asset base and earnings.

All of the other banks have cut expenses and employees during the past ten years to survive during low-interest-rate environments. Using Bank of America as an example, BOA had more employees going into the Great Recession than WFC, but in the past ten years has restricted its bank for efficiencies that resulted in reducing the workforce by more than 50,000 employees. WFC has increased its employees since the Great Recession.

Charles Scharf acknowledged in the most recent earnings call that the bank has plenty of work to improve the efficiency of the bank to be able to compete with competitors. He estimated that the bank would eliminate more than $10 billion in expenses.

The Bear Case against WFC

WFC has a few things working against it. Below is a shortlist of the challenges the bank is facing:

  • Low-interest rates – puts a strain on earnings. This is an industry-wide problem but will remain an issue for multiple years.
  • Limit on growth – the Fed has limited WFC from growing, and it is smaller than C and JPM with no opportunity to grow and compete on the same asset level.
  • Cost Cutting – WFC has not managed its expenses or costs well since the Great Recession. While this could be an opportunity, it is a downside too that it is not as efficient as the other banks.

The Bull Case for WFC

  As a result of all the negative points made above has resulted in WFC being the cheapest it has ever been based on price to tangible book. Depending on the actual losses, it could result in a 30% upside from current levels.  Additionally, even though most recently, WFC only had an ROE of 3.45%, it has averaged 12.59% ROE over the past five years.

The new leadership team is also a bull case of having a respectable CEO leading the bank to help right the ship with regulators. Additionally, starting to cut expenses will see earnings improvements, which will also put the bank in a position to compete with its peers.

Once the current issues are resolved, the bank will reinstate its previous dividend, which will also increase the share price. Buying now might provide an opportunity if WFC can solve all of its issues.


Wells Fargo has taken hits over the past few years, and the dividend cut is close to the bottom of its troubles. With new management in place and known issues identified, WFC is in an excellent position to correct the problems and move forward.

WFC should benefit from cost-cutting, end of the COVID-19 crisis, interest rates rising, and, last but not least, the approval of the Fed to allow WFC to grow its assets. A side note as I am not aware of this, but an expansion of its trading division would be beneficial too! The main risk at this point is if WFC can not shake the scandals and clean up its recent regulator and brand troubles.

Depending on your risk tolerances, WFC could be an excellent opportunity for a long term hold.

This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.

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