Wells Fargo (NSYE: WFC) has taken a beating not only from the COVID-19 pandemic, but also from new scandals that claim the bank favored certain clients over others in order to maximize profit. The bank has been trying to overcome the ongoing fraud investigation into the creation of millions of fraudulent savings and checking accounts in the name of its existing customers. Due to that investigation that started in late 2016, the Federal Reserve has capped the banks ability to grow its loan business. However, during the COVID-19 pandemic, the Federal Reserve temporarily removed the cap in order to allow Wells Fargo to participate in the payroll protection program (PPP).
The problem with many claims that Well Fargo is screwing small businesses that try to participate in PPP is that they fail to acknowledge that the bank will donate the fees it generates from PPP to nonprofits that support small business. Therefore, Wells Fargo is trying to build goodwill with the public to overcome the damage done to its image because certain Wells Fargo employees that greedily increased their bonuses by creating fake accounts.
So why is Warren Buffett going to purchase more Wells Fargo after trimming his position last year? It is simple. Wells Fargo is extremely undervalued! And second, Warren Buffett’s investment vehicle, Berkshire Hathaway, has room before it hits the 10% cap. There is more regulatory scrutiny under the federal Change in Bank Control Act if 10% is exceeded and Warren Buffett has decided that staying below 10% is best. This is why you don’t see anyone of the bank holdings exceeding 10% and if they do because of buybacks, he will trim the position to below or at 10% (see holdings).
Wells Fargo is selling for 75% of tangible book. That is much better than its nearest best rivals; JPMorgan (NYSE: JPM) 146% and Bank of America (NYSE: BAC) 106%. Citigroup (NYSE: C) is cheaper at 58%, but considering that Warren Buffett does not own Citigroup, there may be a reason for its lower valuation. Citigroup pays more for its deposits than Wells Fargo, which may account for most of the difference in valuation. Citigroup is considered one of the bulge bracket investment banks (formly Salomon Brothers) and has asset management (formly Schroders), but it is mainly a consumer bank and credit card company, whereas JPMorgan and Bank of America have significant investment banking and wealth/asset management operations. Wells Fargo is also more of a consumer bank since Wells Fargo Securities (formly Wachovia Securities), which is mainly focused on wealth management, is not a significant part of the business. Therefore of the big banks, Wells Fargo and Citigroup are more exposed to changes in interest rates.
Although Wells Fargo has a lower valuation, part of it may be deserved since the bank has exposure to the oil industry, which may lead to loan losses. In the last quarter Wells Fargo increased its reserves for loan losses, which impacted its earnings.
If the Federal Reserve made the removal of the loan cap permanent, then WFC stock is going surge and come closer to the valuation of JPM and BAC stock.
Right now Warren Buffett’s company, Berkshire Hathaway, owns about 8.4% of total shares outstanding for Wells Fargo. If you believe that the Federal Reserve will not go to negative interest rates, that Wells Fargo can overcome its perception by consumers, that the Federal Reserve will remove the cap and that the bank has many other opportunities for growth other than traditional consumer and commercial banking, then you should buy WFC at these low valuations.
Disclosure: I own WFC stock. I do not own JPM, BAC or C stock.
