Wells Fargo (WFC) investors breathed a sigh of relief last week when the bank beat on both the top and bottom lines.
This was an important earnings call for Wells Fargo. Fears have been swirling around the bank’s future following the fake accounts scandal, which showed widespread illegal and immoral activity among Wells Fargo employees desperate to reach targets that had little impact on the company’s financial performance. That scandal has led many to worry the public has lost confidence in this U.S.-market dependent bank, meaning its business will decline in the future.
If that is doomed to be, it hasn’t happened yet. Revenues rose 1.9% to $22.3 billion, a slight beat, while EPS of $1.03 beat by 2 cents.
But what is Wells Fargo doing about its scandal? Well, John Stumpf has stepped down without a bonus—an important symbolic move for the bank that led to many encouraging headlines. However, he’s been replaced by Timothy Sloan, the bank’s former Chief Operations Officer. Since the sales targets were a part of the bank’s operations, it remains unclear how clean Sloan’s hands are in the scandal.
Interestingly, when Sloan addressed Stumpf’s retirement, he deftly avoided taking any responsibility or ascribing responsibility to the former CEO. In fact, Sloan spun the retirement into a praise of his former boss:
“He [Sumpf] made this decision because he believed his leadership had become a distraction and, therefore, the best thing for Wells Fargo was for him to retire. This action demonstrates the dedication John has had to Wells Fargo throughout his 34 years with the company, including successfully leading us through the financial crisis and the largest merger in banking history.”
Later on, he does ascribe guilt to Wells Fargo as a corporate entity:
“I know that this is not the type of activity you expect from Wells Fargo and is certainly not what we expect from ourselves. We let down our customers, our shareholders and our team members. We simply failed to fulfill our responsibility to all our stakeholders.”
Of course, the language of all of this is carefully scripted and designed to avoid legal problems while also placating investors who are displeased with how the scandal has hurt the stock.
Which leads us to the financials. The stock’s P/E ratio is now 11, on the lower end of the financial sector which is already struggling on fears that low interest rates and other headwinds are hurting their business model. On a P/S basis, its market cap represents a 2.5 P/S ratio—again quite low, especially considering the firm’s revenue has been growing for every quarter since 2Q of 2014. Meanwhile, the company’s book value has surged by over 3% in the last year—impressive for a bank worth around $200 billion.
Another and very important metric suggests caution, however. WFC’s price-to-book value is now 1.26, which is about double Bank of America’s (BAC) metric, which is at 0.68, and significantly higher than JP Morgan (JPM), at 1.08, and Goldman Sachs (GS), which is at 0.92. In fact, WFC is one of the most expensive financial stocks out there using this metric—which is a popular one in the financial sector.
This is partly because WFC is one of the few bank stocks to see growing revenues consistently over the last few years—and now we need to wonder if revenues will decline as a result of this scandal. This is the key question anyone looking at WFC needs to ask right now, and it is a question we will see get answers in future earnings calls.