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Wells Fargo’s Recent Dip Has Created a Buying Opportunity

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Wells Fargo got hit with fines in September. Despite the apparent bad news, however, the bull case for WFC stock...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

Wells Fargo (NYSE:WFC) has been an incredible comeback story. The company was slammed by the twin blows of its customer accounts scandal and the novel coronavirus. During the years that encompassed those two crises,  WFC stock plunged from $55 to $20. Famous investors, including Warren Buffett, dumped their stakes of the company, and Wells Fargo hit rock bottom.

Wells Fargo (WFC) bank sign in yellow and red with wagon logo. The sign is flanked by tall grass
Source: Ken Wolter / Shutterstock.com

Now, though, the shares have roared as much as 150% off their lows. The bank’s profits are surging tremendously, and its outlook is promising . As a result, the bank’s stock price topped $50 in August, well above its level of the same period a year earlier.

Over the past month, however, Wells Fargo has cooled off a little. The stock market in general has gotten a little bumpy, and a couple of company-specific issues have also affected Wells Fargo. However, the company’s long-term trajectory has not changed.

Wells Fargo Pays Two Small Fines

Regulators hit Wells Fargo with two separate fines in September. First, the Office of the Comptroller of the Currency (OCC) slapped Wells Fargo with a $250 million fine.

The OCC had been investigating Wells Fargo for many years and had obtained a consent order against the bank. Many analysts feared that Wells Fargo would end up having to pay a much larger fine. All things considered, $250 million is not a  heavy fine for Wells Fargo. And importantly, the OCC’s probe is over.

The Department of Justice (DOJ) lodged the government’s other major complaint against Wells Fargo. The DOJ found that Wells Fargo had overcharged hundreds of customers, mainly small and mid-sized businesses, for performing currency transactions. It fined Wells Fargo $37.3 million, ending the issue.

The events certainly stirred up more bad press for the bank. However, a combined $287 million of fines simply isn’t a big deal for the bank. Wells Fargo generated more than $14 billion of net income over the past 12 months. So the fines constitute just 2% of a year’s worth of income for the bank.

 The Bank’s Asset Cap

The asset cap is the other major new issue for Wells Fargo.

The bank  is not allowed to own more than  $1.95 trillion of assets for the time being. That limit is part of its punishment for its past scandals. The Federal Reserve has said previously that it won’t get rid of this restriction until it has solved its governance and risk-control problems.

At his last press conference, Fed Chairman Jay Powell affirmed that Wells Fargo’s asset cap will remain in place for the time being. The statement seemed to imply that Wells Fargo will have to wait some time before the asset cap is eliminated.

That’s negative for WFC stock. However, most analysts hadn’t expected the cap to disappear in 2021 anyway, so it shouldn’t tremendously affect Wells’ earnings outlook.

The Macroeconomic Backdrop

Stocks fell significantly in September. There were several reasons for the downturn.  The credit/housing crisis in China played a major role.

However, the Federal Reserve added to the uncertainty facing the market. Powell hinted that the Fed is set to begin tapering in the near future. Not only that, but the Fed intends to end its asset purchases by mid-2022. The tapering process will be much faster than many had anticipated.

More hawkish monetary policy tends to be negative for the stock market. However,  banks are in a different situation. After all, they tend to earn higher net interest margins (NIMs) when interest rates increase. Consequently, with the Fed suggesting that it will have to take more aggressive measures to curtail inflation, its new, more hawkish outlook should help the banking sector.

The Bottom Line on WFC Stock

At this point, Wells has far higher operating costs than most other too-big-to-fail institutions because it has extra legal and compliance costs that stem from its past scandals. Once those issues are resolved, Wells Fargo annual costs will tumble by $8 billion, increasing its earnings per share by almost $2.

As a result, the bank’s EPS should reach $6. If its EPS climbs to $6, the shares would be worth $60 if their price-earnings ratio is 10 times or $75 if their P/E ratio is 12.5 times.  Once the Fed lifts the bank’s asset cap, Wells’ EPS may climb even more.

Meanwhile, the negative headlines arising from the  bank’s previous issues should not affect  WFC stock over the longer term.

On the date of publication, Ian Bezek held a long position in WFC stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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