Wells Fargo Unlikely to Reward New Shareholders

Wells Fargo and Co. (WFC) is trading higher by less than 1% in Wednesday’s pre-market after beating Q2 2021 top and bottom line estimates by wide margins. America’s third-largest bank earned $1.38 per-share during the quarter, $0.47 higher than expectations, while revenue rose a modest 10.8% year-over-year to $20.27 billion, more than $2.50 billion better than consensus. Net interest income fell 11% in reaction to lower interest rates, despite the near-panic about spiking bond yields earlier this year.

Fallout from Account Fraud Scandal

Rapid improvement in the U.S. economic landscape allowed the company to reduce credit loss reserves by $10.8 billion, compared to an $8.4 billion increase in the same quarter last year. Home lending revenue shined during the quarter, with the ultra-hot housing market generating a 40% increase in mortgage servicing income. However, those increases were partially offset by lower gains on loan portfolio sales and lower correspondent origination volume.

Well Fargo has underperformed other U.S. commercial banks in recent years, with its reputation destroyed by a 2016 account fraud scandal that forced major operational changes. In reaction, the Federal Reserve issued a 2018 directive forbidding the company from growing its balance sheet until the central bank is “satisfied” that compliance issues had been rectified. That prohibition remains in force three years later, translating into billions in lost income.

Wall Street and Technical Outlook

Wall Street consensus is mixed compared to other commercial banks, with an ‘Overweight’ rating based upon 13 ‘Buy’, 3 ‘Overweight’, and 11 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $40 to a Street-high $65 while the stock is set to open Wednesday’s session more than $5 below the median $49 target.

Wells Fargo posted an all-time high at 66.31 in 2018 and sold off, entering a decline that accelerated to an 11-year low during 2020’s pandemic decline. It hit an even lower low in November and turned higher, stalling less than a point below the .618 Fibonacci selloff retracement level in May. Heavy price action since that time has flipped long-term relative strength readings into sell cycles, predicting downside that could test the 200-day moving average in the upper 30s.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.