<p>Wells Fargo (NYSE: WFC) still pays for the sins of its past.
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Many, myself included, believed that the past ended when Charles Scharf was hired by Visa (NYSE: V) to run the bank at the end of last year.
I went so far as to buy some shares and have since taken a huge loss. Wells Fargo opened for less than $ 30 per share on March 12, after trading at over $ 50 at the beginning of the year.
This takes the bank far beyond the finding. The price / profit ratio is below 10. The dividend of 51 percent per share gives approximately 6%. This assumes that there is income and that the dividend can be paid at a bank that had assets of $ 1.9 trillion at the beginning of the year.
The past is a prologue
William Faulkner once said, “The past is not dead. It’s not even the past. ”
Such is the case with Wells Fargo. Witnesses before the congress recently, Scharf acknowledged the bank’s flawed business model and broken culture. He promised change. But it was not good enough. It was not enough for chairman Elizabeth Duke and board member James Quigley to resign before speaking. Democrats want people to go to jail.
Promise from Scharf’s predecessor, Allen Parker, was that the bank had learned its lessons from the scandal. But he seems to have spent most of his time trying to minimize the bank’s penalties. Home investigators found that the company’s culture was not fixed.
Scharf became CEO in October and moved to close the books on the fake account scandal with a $ 3 billion fine. The reaction was that the bank got away with murder. The agreement does not cover mortgage or car loan companies, so larger fines may apply. Prosecutors said they would not prosecute if the bank cooperated for the next three years.
Since the hearing, Wells has warned of cuts in net interest income and warned that the coronavirus from China could cause even more damage. But the damage it predicted was minimal, slightly in the middle of single digits. These estimates can now, as said in the 1970s, not work.
The protection built into the banking system after the financial crisis in 2008 and through the Dodd-Frank Act now comes into play.
At the end of 2019, Wells Fargo had a capital ratio of 15.3 and was able to take losses corresponding to 23.3% of its capital.
This is a significant buffer against losses that can now be tested. Wells made many loans to the energy sector. Of course, the federal government can also intervene and guarantee loans and payments while the nation is in quarantine.
Critics like Dealbreaker, owned by veterans of Bloomberg Media, continue to hammer Wells as hard as the Congress Democrats. They write that morale at the bank is bad, and that Scharf’s plan to make the bank a version of JPMorgan Chase (NYSE: JPM) is flawed.
Until Scharf can pull Wells Fargo out of his self-induced dive and get past the current crisis, he can not quickly deal with the bank’s outdated technology platform. Scharf’s former employer at Visa now has more than twice the market value of Wells Fargo.
The conclusion on WFC stock
Wells Fargo can handle the current storm. Scharf can reform the bank.
Nobody listens to it because fear continues to seize the markets, but thanks to the capital controls created after the 2008 crisis, it is so.
Once the bottom has been found, investors with cash can consider WFC stocks. You do not want to grab the falling knife. Let it go and keep your money for now.
But when the run is over, I buy more shares.
Dana Blankenhorn has been a finance and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available in the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. At the time of writing, he owned shares in WFC and JPM.