Wells Fargo’s share price saw a 6% bump on Tuesday, when it named a new CFO.
Photo: Peter Foley/Bloomberg NewsWells Fargo WFC -0.34% did some needed work in the second quarter. The bank’s turnaround still has a way to go.
Coming into earnings season, Wells had a relatively smaller allowance for loan losses than its peers by some measures. Before its second-quarter report, Wells’s allowances had represented about a quarter of losses projected by the Federal Reserve in its severe 2020 stress-test scenario, according to analysts at Wolfe Research. That compared with an average of more than a third across 16 large banks, Wolfe noted.
There were reasons for that, namely that Wells is relatively smaller than peers in consumer credit cards, a category that has been early to show red flags due to looming unemployment. But as the pandemic took its toll across the economy, the Stagecoach caught up in a hurry. Wells’s second-quarter allowance increase for potential commercial loan-losses was $5.5 billion. Its overall allowances now stand at 43% of severe stress-test losses, about where peers such as Bank of America and U.S. Bancorp sit, according to Wolfe.
Whether that build is now mostly done remains to be seen. Big banks generally are reserved for consumer-loan losses more than half as bad as the Fed’s severe scenario projection, but for commercial losses about a third as bad. Many businesses are for now being propped up by Federal Reserve largess of one form or another, but a day of reckoning could be ahead for certain sectors.
Regardless, Wells faces other challenges going forward. The asset cap imposed on the company by the Fed continues to have a broad impact on its business. For example, it meant that the bank couldn’t lean into the quarter’s corporate fundraising boom as much as peers because of limitations on how it could finance clients. Overall, Chief Financial Officer John Shrewsberry suggested to analysts that the bank’s net interest income decline would have been half as steep had the bank been able to increase its books by 10% or so during the Covid-19 period.
In home lending, where the bank is a giant, it is still producing more, but it also faced the headwind of faster prepayments that reduce the value of its mortgage-servicing rights.
There is one big thing in Wells’s favor: a cost base that has room for cuts. Chief Executive Charles Scharf says the bank needs a $10 billion-plus reduction to its expense base. The stock saw a 6% bump on Tuesday when Wells named a new CFO who will be in place as that effort gains steam. The bank hasn’t yet given any detailed timeline for achieving the cuts, though perhaps some of the pandemic’s long-term effects can be a tailwind, such as reducing the necessary physical footprint. Still, there are also costs associated with supporting employees and clients through this uncertain crisis.
As a too-big-to-fail institution trading at a deeper discount to book value than many peers, Wells is a tempting long-term play. But for now, the balance of risks still warrants caution.
Write to Telis Demos at telis.demos@wsj.com
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Wells Fargo Still Has a Way to Go - The Wall Street Journal
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