Is Wells Fargo a Buy After Third-Quarter Earnings?

The financial sector has been beaten down tremendously in 2020, and Wells Fargo (NYSE:WFC) has been hit harder than most. And this is after already-poor performance in its recent scandal-plagued years. In this Fool Live clip from a recent Industry Focus: Financials recording, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a closer look at the bank’s latest numbers and whether it could be finally worth a look.

Jason Moser: Well, let’s move over to Wells Fargo. This is the one that has taken Bank of America’s (NYSE:BAC) place as being the financial media’s whipping post, so to speak. It just seems like they can’t really do anything right. It wasn’t one of the greatest quarters in the world; I think we all expected that. But then of course, you have that whole PPP loan scandal or you’ve got employees lying to obtain loans. It seems like it’s just one thing after another.

A quote that came from the call basically said their top priority continues to be the implementation of risk control and regulatory work. I feel like that maybe is top priority 1A and 1B, clearly is the culture. There’s stuff going on within this company that hasn’t fully really been fixed yet. But let’s talk a little bit. Let’s go “glass half full” here first. What about this quarter for Wells Fargo did you like?

Matt Frankel: Well, to be fair, they’re more closely scrutinized than every other bank right now, so you’re going to find a lot more.

Jason Moser: Seems like they earned it, but go on.

Matt Frankel: They absolutely did. Like Buffett says, when you find a cockroach in the kitchen, there’s usually not just one. So now that they found the cockroach in the kitchen, which was the fake account scandal, now everything else they do is really scrutinized. The latest thing was purely employees doing things on their own, it’s worth mentioning. They didn’t defraud anybody; it didn’t affect any of Wells Fargo’s customers. It was employees behaving badly.

Jason Moser: It likely wasn’t even really a faulty incentive structure. It seems like it really was just like you said, just a few bad apples.

Matt Frankel: Right. Because Wells Fargo is scrutinized, things just fell under the microscope. But this is a stock that trades for 60% of its book value. Not a while ago, Wells Fargo was the most valuable bank stock by price-to-book. They were regularly trading at one and a half times book or even more. They’re trading for literally about less than half of what they used to.

Jason Moser: That’s amazing.

Matt Frankel: But going into this quarter, their net interest income was down by 90%, which Wells Fargo is purely a commercial bank. So that’s to be expected in a low-interest environment. They missed earnings, but they were profitable, which is definitely a good sign.

I’m sorry. The second quarter, they had a big, big red arrow there with the profitability, and remember they had to cut their dividend because they had to set aside so much in reserves.

That wasn’t the case this quarter. They were profitable, they earned enough that if this continues, they’ll be able to reinstitute their dividend where it was. They did set aside loan losses. They were the only of the big banks I think that actually had to build their reserves this quarter. But it was by less than was expected. They were expected to set aside about $1.8 billion; they set aside about $0.8 billion. That was good news. That’s compared to $9.5 billion in the second quarter that they had to set aside for losses.

Jason Moser: Holy cow.

Matt Frankel: This is definitely an improvement. But like I said, Wells Fargo is out of the five we’re talking about. The closest thing to a pure savings and loan that we’re getting out of the big banks. They are…