Shares of Well Fargo have been under a regulatory cloud ever since the Federal Reserve placed a cap on its total assets in April 2018. To lift the cap, the company must demonstrate that it has implemented an effective remediation plan that guards against a repeat of the abusive sales practices that led to the creation of millions of deposit and credit card accounts without customers’ consent.
Since that scandal came to light, three CEOs have come and gone. The fourth and current CEO, Charles Scharf, who formerly led BNY Mellon, came aboard in October 2019. Besides beefing up the bank’s risk management function (to address the Fed’s greatest concern), Mr. Scharf has initiated a reorganization of Wells Fargo’s businesses, increasing the number of business units from three to five to mirror organizational structures of its money center peers. Recent press reports indicate that the company may be looking to exit certain businesses, such as corporate trust and asset management. Mr. Scharf has also installed new executives in key positions, including most recently CFO Mike Santomassino.
Since the Fed’s asset cap has been in place for two-and-a-half years, far longer than most would have expected, the timing of its removal is now firmly in Wells Fargo’s hands.
One obvious reason for the delay is the pandemic, which has required much of management’s attention, delaying the completion of the organizational restructuring. Wells Fargo and its peers beefed up their loan loss reserves in 20Q2, but the long-term impact of the pandemic is unclear. Obviously, the quicker it ends, the less chance that it will permanently harm Wells Fargo’s profitability and capital position. This uncertainty has weighed on all banks’ share prices, which have underperformed the market significantly so far this year.
Despite the recent spike in COVID-19 infections, most of the economic disruption caused by the pandemic is likely in the rear view mirror. Management should be able to complete its organization revamping and exit the asset cap early next year. This should give a boost to Wells Fargo’s beleaguered share price.
Wells Fargo’s stock trades at just 0.67 times tangible book value per share, well below its peer group average of 1.2 times. The discount amounts to $44.5 billion, which far exceeds potential losses under the Supervisory Severely Adverse Scenario in its 2020 Dodd-Frank Act stress tests.
Even so, a meaningful rebound in Wells Fargo’s share price requires a change in market sentiment toward the stock that embraces the belief that the company’s profitability is on a recovery path toward pre-pandemic levels, helped by a steady restoration of the dividend. While the course of the pandemic is still uncertain, I believe that the economy will recover over time and consequently that the new management team can achieve a turnaround in the company’s financial performance. Accordingly, my 12- to 18-month price target for the stock is $32 or one times book value, which equates to a potential gain of 50%.
November 18, 2020 (Original report published on November 3, 2020. Contact me to obtain a copy.)
Stephen P. Percoco
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