Wells Fargo & Co: Is the Worst Over for WFC Stock?

Wells Fargo & CoWells Fargo Stock May Have Finally Bottomed

It has been a rocky road for Wells Fargo & Co (NYSE: WFC) stock, but the worst may be over.

In April, Wells Fargo & Co settled the lawsuit that the U.S. Department of Justice brought against it for improper lending practices. The contingency has been on the bank’s balance sheet for some time—buried in its more than $120.0 billion of “Accrued Expenses and Other Liabilities”—and will be paid out by the end of this year from its more than $315.0 billion in cash and short-term investments.

All of this is mentioned here to point out the enormous scale of Wells Fargo and to illustrate that, in the grand scheme of things, paying out $1.2 billion won’t “have a material adverse effect on Wells Fargo’s consolidated financial position.” (Source: “Wells Fargo & Company/MN (Filer) CIK: 0000072971,” U.S. Securities and Exchange Commission, last accessed August 30, 2016).

With that out of the way, will it be smooth sailing for WFC stock going forward? Maybe.

Time to Be Bullish on Wells Fargo Stock

For the quarter ended June 30, Wells Fargo & Co reported (in that same 10Q) that, while revenue was off by about $33.0 million from the previous quarter, its net interest income (a key indicator of how a bank is doing, given that it is both a borrower and a lender) grew by some $66.0 million. Yet, a closer look at this number shows that a big chunk of that came from its recent acquisition of GE Capital. Nevertheless, in the same quarter, the net interest margin (the difference between what the bank makes as a lender and pays out as a borrower) was off by nearly three percent. This will be an important metric to watch for WFC stock, which I’ll get to later.

Then there is the issue of the credit quality of Wells Fargo’s loan portfolio (everything from mortgages to auto, credit card, and student loans). Year-over-year, their provision for bad loans has escalated from about $300.0 million to more than $1.0 billion, and their net charge-offs grew from about $650.0 million to more than $900.0 million.  The total value of their non-performing assets rests at a hefty $13.1 billion. (Source: “Wells Fargo Reports $5.6 Billion In Quarterly Net Income,” July 15, 2016).

Now, let me put this into perspective. In the 12-month period ended June 30, Wells Fargo’s loan portfolio grew by nearly $69.0 billion, with growth in every category. And when you consider that the bank’s loan portfolio is more than $950.0 billion, their non-performing loans measure up to a scant 1.34%. Their net charge-off rate comes in at less than 0.40% of the total reserved. So what does all this mean for Wells Fargo stock?

I don’t think the bank’s loan portfolio is a cause for concern, and I wouldn’t expect it to mean much as it relates to how Wells Fargo stock behaves in the near term. It’s the long term that is more interesting and I expect that other outside factors could benefit WFC stock.

What Does A Fed Hike Mean For Wells Fargo Stock?

The most significant of these outside factors is likely to be an expansion of the net interest margin, which I alluded to earlier. In her speech at the “Designing Resilient Monetary Policy Frameworks for the Future” symposium in Jackson Hole, Wyoming last week, Fed Chair Janet Yellen gave her clearest indication yet that interest rates would be headed higher. (Source: “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future,” Board of Governors of the Federal Reserve System, August 26, 2016) I’m inclined to believe that, over the course of the next eight years, we’ll see a rising interest-rate environment. That will set the table for an expanded net interest margin and could be positive for WFC stock for an extended period of time.