It’s gotta be excruciating to be an investor in bank stocks on 2020. Watching the market rally to all-time highs (during a pandemic, no less) and seeing large-cap tech crushing it, while banks are seemingly paddling through mud.
The fact that the Financial Select Sector SPDR Fund (XLF) is still down some 20% year to date, compared to the Technology Select Sector SPDR Fund (XLK) which has risen 31%, highlights the disconnect that exists between the two industries. Notably, for banks, it highlights the level of concern the market still has with the state of the economic recovery. Although Wells Fargo (WFC) has had its own legacy issues prior the pandemic, the situation has magnified the deficits it has had to deal with in terms of its own recovery.
The troubled bank is set to report third quarter fiscal 2020 earnings results before the opening bell Wednesday. But is it finally time to place a long-term bet here? Analysts estimates for Wells Fargo calls for not only a Q3 profit, but also for profitability to rise each quarter from this point through the middle of 2021. Essentially, analysts are saying, as economic conditions improve, Wells Fargo is positioned to rebound strongly. What’s more, loan losses no longer become the risk they are now amid the pandemic.
This means the bank has plenty of catalysts to sustain profitability and return value to shareholders. With the stock trading around $25 per share, down 53% year to date, Wells Fargo could be poised for a strong rebound in the next 12 to 18 months. For that argument to matter, particularly in a low-interest rate environment, investors on Wednesday will want to hear how the bank plans to offset the low rates and grow revenue in mortgage lending and consumer businesses.
For the three months that ended September, analysts expect Wells Fargo to earn 47 cents per share on revenue of $20.82 billion. This compares to the year-ago quarter when earning were 56 cents per share on revenue of $22.95 billion. For the full year, ending in December, earnings are projected to 13 cents per share, down from $4.05 per share a year ago, while full-year revenue of $71.55 billion would decline 16% year over year.
The length and severity of the economic downturn has without a doubt taken a considerable toll on bank operations. And it was more noticeable on Wells Fargo’s Q2 results which came to a loss of 66 cents per share. Not only was that worse than the 10-cent loss analysts were expecting, is reversed the 57-cent per share profit earned in the first quarter. Still heavy under the scrutiny of regulators and lawmakers, the San Francisco-based bank was required to build up its reserve for loan losses which came to $8.4 billion, compared to a $3.1 billion in Q1.
What’s more, as a means to preserve capital, the bank slashed its quarterly dividend by 80% to 10 cents a share, down from 51 cents. The move was broadly expected, but not to such an extent. Estimates had called for a cut of 40% to 50%. Wells Fargo’s yield, at one point, was the incentive to own the stock. With the yield gone, the shares — down 50% in 12 months — have struggled to rebound. On Wednesday, and likely from this point forward, the bank will have to rely on something it has struggled with to repair its stock: Its execution.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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