During the past financial crisis, some banks were near the core of difficulties. Varied analogies and labels described their importance to the economy and society. Ultimately, “Too Big to Fail” was probably most pervasive, though there were comparisons to one’s circulatory system at the recession’s onset.
Close to 12 years have since elapsed and they still might not be favorites during this election year. Pharmaceutical companies could be the most politically loathed of all–however, with the Covid-19 pandemic and national emergency, they might actually be looked toward or sought for remedies. It is actually the airlines and travel industries that need aid, as well as untold small businesses that must pay for rent and expenses while, in many cases, being ordered closed to the public. The situation could actually be that, with regulations that help to shore up the banks for a situation such as we have now, there is reason to have a positive perspective on the ramifications of those past reforms.
Meanwhile, the 2020 Cares Act legislation is a $2 trillion outlay. The federal deficit is already particularly high, associated with unstable short term borrowing rates, and the national debt keeps climbing. There are loud opinions stating that the colossal expenditures are needed. Hopefully it is not relevant that a credit rating downgrade only happened pursuant to an inability to increase the debt ceiling in 2011.
Repurchase of common stock and payment of dividends have been forbidden for companies that accept government help. Corporate buyback programs are being put on hiatus. Some companies retire their shares at peak prices, rather than at a trough.
No one knows how all of the ongoing problems are going to shake out. There is a great chance of persons attempting to model varied scenarios–Bill Gates knows how to use a spreadsheet better. However, it is reasonable to foresee a marked increase in unemployment rates, which is a known problem for the economy and banks that operate within it.
The share price of Wells Fargo (WFC) reflects these matters and others, such as the fake accounts scandal carried out under the watch of its previous CEO, John Stumpf. The matter persisted through the term of his successor, Timothy Sloan. After the brief tenure of an interim leader, C. Allen Parker, there is a new CEO in place, Charles Scharf. Scharf was formerly in charge of Visa, and he has bought 176,916 shares of WFC at a price of $28.69.
Per available information, the corporation itself is still repurchasing stock; though it may cease to do so amid the pandemic. There are varied parameters that can be relevant to share buybacks. A simple technical evaluation, such as observing whether or not the stock is at an all-time high price may not suffice. Pertaining to banks, which are heavily influenced by market interest rates, balance sheet measures such as book, and tangible book, value merit attention.
Here is how Wells Fargo describes tangible book value, or tangible common equity:
“Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, goodwill, certain identifiable intangible assets (other than MSRs) and goodwill and other intangibles on nonmarketable equity securities, net of applicable deferred taxes.”
Per most recent financial data, the banking giant reports $33.50 per share in tangible book value. The stock currently trades at under $30. Thus, investor ownership represents, for the most part, a markdown on hard assets. (Book value assets minus liabilities is higher, at $40.31.) Generally, if you presume that a business is free of failure–they almost are never risk-free–then its share price could be a bargain if it is available at under book value, as opposed to a multiple of it. If it were to go bankrupt, tangible book value should be a rough approximation of what would remain for creditors (Perhaps like if a stand alone warehouse is worth exactly $1 million and you can own 1/1000th of it for $850, and not only that, but it might remain profitable and invest in the building).
Also, at the depressed price, the bank’s quarterly dividend of $0.51 amounts to a yield of over 7%. If it is buying back shares, it eliminates distributions made on them while increasing the proportionate ownership stakes of investors. The common share count is actually down 21% since 2012. So what is being saved on dividend payments should be…
What are the problems?
Wells Fargo stock is off its low of $25.11. After rising above $30 on Thursday, it may retest the mid-$20s. If there is support at above $25, it could rise immediately. However, patience can payoff.
In future quarters, there is a probability of earnings being decreased as MSRs decline in value and the bank provisions credit losses. Lower interest rates should also mean a reduced net interest margin, and therefore negatively affect loan income. The bank should not currently have to pay the Federal Reserve to hold its deposits there, though the return on most treasuries is evidently negative when adjusted for inflation.
For the reasons just stated, in both paragraphs directly above, confidence is not high that the stock won’t go lower before it goes higher. Again, if there is support at above $25, it probably will go back up very fast from there. There is no guarantee though, and it could keep tumbling or maybe go higher tomorrow.
The situation is attributable to an ongoing crisis, and Wells Fargo needs to meet requirements that are designed to withstand shocks and stress. The issue involving fraudulent accounts could have run its course. If so, it makes sense that the new CEO, recruited from outside the bank, bought stock with his own money. It pays over 7% a year to anyone willing to maintain a substantially discounted claim on hard assets, which seems that it should eventually prove a terrific deal.
The author owns stock in Wells Fargo.
Close to 12 years have since elapsed and they still might not be favorites during this election year. Pharmaceutical companies could be the most politically loathed of all–however, with the Covid-19 pandemic and national emergency, they might actually be looked toward or sought for remedies. It is actually the airlines and travel industries that need aid, as well as untold small businesses that must pay for rent and expenses while, in many cases, being ordered closed to the public. The situation could actually be that, with regulations that help to shore up the banks for a situation such as we have now, there is reason to have a positive perspective on the ramifications of those past reforms.
Meanwhile, the 2020 Cares Act legislation is a $2 trillion outlay. The federal deficit is already particularly high, associated with unstable short term borrowing rates, and the national debt keeps climbing. There are loud opinions stating that the colossal expenditures are needed. Hopefully it is not relevant that a credit rating downgrade only happened pursuant to an inability to increase the debt ceiling in 2011.
Repurchase of common stock and payment of dividends have been forbidden for companies that accept government help. Corporate buyback programs are being put on hiatus. Some companies retire their shares at peak prices, rather than at a trough.
No one knows how all of the ongoing problems are going to shake out. There is a great chance of persons attempting to model varied scenarios–Bill Gates knows how to use a spreadsheet better. However, it is reasonable to foresee a marked increase in unemployment rates, which is a known problem for the economy and banks that operate within it.
The share price of Wells Fargo (WFC) reflects these matters and others, such as the fake accounts scandal carried out under the watch of its previous CEO, John Stumpf. The matter persisted through the term of his successor, Timothy Sloan. After the brief tenure of an interim leader, C. Allen Parker, there is a new CEO in place, Charles Scharf. Scharf was formerly in charge of Visa, and he has bought 176,916 shares of WFC at a price of $28.69.
Here is how Wells Fargo describes tangible book value, or tangible common equity:
“Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, goodwill, certain identifiable intangible assets (other than MSRs) and goodwill and other intangibles on nonmarketable equity securities, net of applicable deferred taxes.”
Per most recent financial data, the banking giant reports $33.50 per share in tangible book value. The stock currently trades at under $30. Thus, investor ownership represents, for the most part, a markdown on hard assets. (Book value assets minus liabilities is higher, at $40.31.) Generally, if you presume that a business is free of failure–they almost are never risk-free–then its share price could be a bargain if it is available at under book value, as opposed to a multiple of it. If it were to go bankrupt, tangible book value should be a rough approximation of what would remain for creditors (Perhaps like if a stand alone warehouse is worth exactly $1 million and you can own 1/1000th of it for $850, and not only that, but it might remain profitable and invest in the building).
Also, at the depressed price, the bank’s quarterly dividend of $0.51 amounts to a yield of over 7%. If it is buying back shares, it eliminates distributions made on them while increasing the proportionate ownership stakes of investors. The common share count is actually down 21% since 2012. So what is being saved on dividend payments should be…
What are the problems?
- Higher unemployment levels can adversely affect borrowers’ ability to repay their loans. If unemployment levels worsen, or if home prices fall, elevated charge-offs and provision expense from increases in allowance for credit losses.
- Job losses appear to be catastrophic .
- Nonfarm payroll data released on Friday, 4/3 is pertinent.
- Wells Fargo reserves for credit losses by establishing an allowance through a charge to earnings.
- Changes in interest rates can affect net interest margin. If funding costs rise faster than the yield earned on assets or if the yield earned on assets falls faster than funding costs, net interest margin could contract. Net interest income and net interest margin can be negatively affected by a prolonged low interest rate environment as it may result in holding lower yielding loans and securities, particularly if unable to replace the maturing higher yielding assets with similar higher yielding assets.
- When the yield curve flattens, or even inverts, net interest margin could decrease if the cost of short-term funding increases relative to the yield on longterm assets. Moreover, a negative interest rate environment, in which interest rates drop below zero, could reduce net interest margin and net interest income due to a decline in the interest on loans and other earning assets, while also likely requiring to pay to maintain deposits with the Federal Reserve.
- Nominal rates remain positive, but are negative when adjusted for inflation.
- Observing future inflation measures could be worth attention. With an elimination or reduction of demand, deflation is a possibility (further lowering rates: bond yields go up with inflation in normal times).
- A downgrade of the sovereign debt ratings of the U.S. government or of related institutions could have material adverse effects on business, financial results and condition.
- There are certain issues related to past practices involving automobile collateral protection insurance policies and issues related to the unused portion of guaranteed automobile protection waiver or insurance agreements.
- When rates fall, mortgage originations usually tend to increase and the value of Mortgage Servicing Rights (MSR) tends to decline. The negative effect on revenue from a decrease in the fair value of residential MSRs is generally immediate, but any offsetting revenue benefit from more originations and MSRs relating to the new loans would generally accrue over time.
- Continued technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for other companies to provide electronic and internet-based financial solutions, including electronic securities trading, lending and payment solutions.
- Most bank branches must be closed, further fueling any disruptive use of apps.
- Wells Fargo’s activities are concentrated domestically, with an emphasis on mortgages. Earnings estimates for the current year have been reduced by about 11% in the past 30 days. It seems professional analysts are underestimating the difficulties ahead. Lofty expectations can lead to future disappointment in the stock market.
In future quarters, there is a probability of earnings being decreased as MSRs decline in value and the bank provisions credit losses. Lower interest rates should also mean a reduced net interest margin, and therefore negatively affect loan income. The bank should not currently have to pay the Federal Reserve to hold its deposits there, though the return on most treasuries is evidently negative when adjusted for inflation.
For the reasons just stated, in both paragraphs directly above, confidence is not high that the stock won’t go lower before it goes higher. Again, if there is support at above $25, it probably will go back up very fast from there. There is no guarantee though, and it could keep tumbling or maybe go higher tomorrow.
The situation is attributable to an ongoing crisis, and Wells Fargo needs to meet requirements that are designed to withstand shocks and stress. The issue involving fraudulent accounts could have run its course. If so, it makes sense that the new CEO, recruited from outside the bank, bought stock with his own money. It pays over 7% a year to anyone willing to maintain a substantially discounted claim on hard assets, which seems that it should eventually prove a terrific deal.
The author owns stock in Wells Fargo.