Another quarter is in the books, and things do not look dramatically different for America's largest banks. While granting that earnings momentum is still lacking, and a huge slug of bad debt and foreclosed homes is an albatross around the industry's neck, this still remains one of the most undervalued industries in the market. Barring a belief that the U.S. economy will never recover or that the government will regulate the industry into the ground, patient investors should consider accumulating and holding quality names like Wells Fargo (NYSE:WFC).
Second Quarter Results Without Much Sizzle
Unlike tech stocks this quarter, which seem to produce exciting results whether good or bad, bank stocks are producing pretty uniformly boring results. Wells Fargo is hardly different in that regard.
Revenue was pretty flat as net interest income grew just $27 million on a sequential basis (0.2%) and fell about 6% from the year-ago level. The company's earning asset base remained stagnant as average loans declined about 1% sequentially and the net interest margin compressed a bit. Non-interest income was scarcely better (though not down as much annually) as what the company gained in card fees, trust fees and trading, it lost in lower service charges and mortgage banking.
Credit numbers continue to improve at Wells Fargo, as the company chews through its own bad loans and those it acquired with Wachovia. Net chargeoffs declined about 21 basis points and non-performing loans were down about 8%, and the company basically matched its first quarter reserve release of $1 billion.
Back to Business as Usual?
It was interesting to see Wells Fargo announce a cost-cutting initiative ("Compass") with this earnings report. Back in the good ole days, Wells Fargo ran a tight ship and this move might be a sign to the Street that management is moving away from a crisis management philosophy to a more normal operating outlook.
Wells Fargo has long enjoyed a strong net interest margin - this quarter, for instance, the bank was well ahead of rivals and peers like PNC (NYSE:PNC), Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Zions Bancorp (Nasdaq:ZION). By running a tighter ship on operating expenses (and doing what it can to stem the loss of lucrative fee income), that should enable Wells Fargo to get back to more normal returns on equity faster than many of its rivals and erase that discount to fair value in its shares.
That said, "business as usual" may not be all sunshine and buttercups for customers. Wells Fargo has also been a relentless cross-seller across its own platforms and it is now time to turn that focus on Wachovia and its customers. Not all customers appreciate the heavy sales pitch, though, and Wells Fargo's drive to wring more revenue (and costs) out of its branches may end up pushing depositors into the arms of SunTrust (NYSE:STI), PNC and other regional rivals.
The Bottom Line
Wells Fargo is far from the only major bank looking to drive more expenses out of its system and reap more revenue from its existing customer base. It will be interesting to see, then, if smaller banks like Umpqua (Nasdaq:UMPQ), Synovus (NYSE:SNV), First Citizens (Nasdaq:FCNCA), or Washington Federal (Nasdaq:WFSL) can regain some competitiveness on the base of a more consumer-friendly experience.
With the sector still in the doldrums, investors are spoiled for choice when it comes to quality bank companies trading at attractive long-term valuations. Wells Fargo was a leader going into the housing mess and while the company certainly committed its share of underwriting sins, it looks like it is in place to be a leader on other side as well. Wells Fargo stock is not the place to make a fast buck, but value-conscious investors should seriously consider holding a few stocks like Wells Fargo as long-term value realization plays. (For related reading, see The Value Investor's Handbook.)
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