Wells Fargo: Too Many Headwinds To Pay Premium

| About: Wells Fargo (WFC)

Summary

Wells Fargo reported decent Q3 numbers as the financial fallout of the fraud case didn't impact quarterly numbers. .

Current trends in the retail banking segment suggest Q4 results will feel the brunt of the impact as consumers opened fewer accounts after the settlement with regulators broke.

The stock doesn't offer an attractive relative value to other large banks that aren't facing these headwinds. .

Before the open, Wells Fargo (NYSE:WFC) reported solid Q3 results though other large financials reported relatively better numbers. The embattled bank is only now starting to deal with the financial impacts of the fraud fallout.

Wells Fargo is trading around $45 where support has existed for the stock all year. The question now is whether the investment thesis remains intact that the large bank is likely cheap, but still doesn't offer the relative value in the sector.

The key narrative for the Q3 results is the understanding that the settlement with the Consumer Financial Protection Bureau and other regulators took place on September 8. The bank is only now starting to feel the real impacts from the settlement and the unveiling of the fraud.

The elimination of the product sales goals weren't effective until October 1 and the CEO just retired on October 12. Due to the short impact to Q3, the unfortunate problem for shareholders is that the "kitchen sink" quarter will occur during the current quarter.

While the old CEO is out, Wells Fargo replaced John Stumpf with an internal candidate. New CEO Tim Sloan was only the COO since 2015, but he has worked at Wells Fargo for 29 years having worked primarily in the Wholesale and Commercial Banking segments. The facts aren't 100% clear whether Sloan was part of the previous management culture that led to the fraud.

Back to the Q3 results, this infographic from AlphaStreet highlights that general business conditions were strong for Wells Fargo. Average loans, assets under management and deposits were all up.

Click to enlarge

The biggest issues impacting net income growth is the squeeze on the net interest margin. For Q3, NIM came in at 2.82%, down from 2.96% last year.

The problem with all these metrics is the rearview mirror look. The fallout from the fraud in retail banking won't hit results until Q4 and beyond.

The bank is already reporting that September retail banking numbers were mostly down from August levels. One prime example is that consumer checking account opens were down 25% from last year levels.

Click to enlarge

Source: Wells Fargo Q316 supplement

Keep in mind, the negativity surrounding these fraud allegations didn't pick up until mid month so the above negative trends were only from a partial month. Ultimately though, the financial impact might be only a hit to growth as opposed to a reduction in assets and deposits at the bank.

With all of these issues impacting future results and more potential impact to existing management questions why investors want to pay a premium price to peer stocks. Compared to JP Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C), Wells Fargo still trades at a premium to tangible book value multiples.

WFC Price to Tangible Book Value Chart

WFC Price to Tangible Book Value data by YCharts

The key investor takeaway is that despite a decent Q3, Wells Fargo is only now feeling the financial impacts of the fraud case. The bank will face higher costs going forward to monitor new account setups and research past account issues. With the stock trading at a premium multiple, the recommendation is to continue avoiding the stock.

Disclosure: I am/we are long C.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.