As earnings pour in, investors might have missed a compelling story: A tale of two banks.
One financial services giant, JP Morgan (JPM) , crushed expectations, posting its best earnings quarter. The market rewarded the superb results with a 7.5% rally last Friday, and back close to the price before the regional banking blowups. Then we have Wells Fargo's (WFC) earnings report, which reflected continued solid execution, unaffected by regional bank difficulties. But the stock traded flat and is down about 15% in recent weeks.
This creates an excellent opportunity to buy WFC at an attractive discounted price.
Bank stocks are starting to separate into winners and losers. Wells Fargo, well-managed by CEO Charlie Scharf, will emerge as one of the winners. While it's not ideal to own stocks in the banking sector ahead of a recession (as investors tend to jettison shares on fears of economic weakness related charge-offs), the bad news is already baked-in. The stock has been discounted due to sector issues, yet Wells' business is mostly untouched by issues plaguing smaller regional banks. With WFC trading below book value of $43 and an 8 p/e, shares can be confidently bought below $40.
Wells Fargo's quarter reflected business-as-usual, and continued execution on efficiency for expenses, earning $1.23, above expectations of $1.12. Charge-off did increase modestly and deposits were down 2% quarter-over-quarter. Net interest income (NII) was solid as expected, up 45% from a year ago to $13 billion, reflecting the benefit of higher interest rates. Wells management issued conservative guidance for the rest of the year given a forecast of slowing economic activity and increased deposit costs.
Shareholders can rejoice at the resumption of share repurchases after a three-quarter pause; buybacks amounted to $4 billion for the quarter and are expected to continue due to ample regulatory capital buffers. At the current share price, repurchases for the year can amount to nearly 8% of Wells' market cap according to Jefferies' estimates. When the buyback is added to WFC's 3% dividend yield, a significant amount of cash flow accrues to shareholders' benefit.
Investing in banks is meant to be somewhat boring, and WFC is no different. After a recent material pullback with management executing well, however, buying this value stock makes for a timely investment. Additionally, potential regulatory relief would be a considerable upside kicker. New management has worked for the past 3.5 years to get out from under the sales practices scandal and the Fed's subsequent asset cap restrictions. Any light at the end of the tunnel will greatly benefit Wells Fargo's business and shareholders.
While the regional banking crisis may be contained, we could still see moments of consternation related to commercial real estate and economic jitters. Take these moments to add to WFC, especially at a bargain price under $40. Management is doing an excellent job of improving efficiency, allocating capital, prudent lending and risk management. The opportunity to buy WFC well below book value will likely not last, so use the recent weakness to jump aboard the stagecoach.
