Is Wells Fargo Bank In Trouble?

The Federal Reserve’s policy of continued rate hikes has decimated the return on fixed-income securities, causing investors to rotate out of low-yielding assets and search for more profitable options instead.

One immediate consequence of this is that the banks are seeing larger outflows of cash as customers update and realign their portfolios to the current situation. Although this might not have posed much of a problem in normal times, the present climate in the financial sector is anything but ordinary.

Indeed, the industry’s facing an existential threat today. The downfall of a single regional banking institution in California’s Silicon Valley unleashed a wave of panic throughout the market, wiping billions from the valuation of some of Wall Street’s oldest and most prestigious enterprises.

While optimism remained high that the contagion could be contained, the bankruptcy of other establishments put paid to that.

However, it wasn’t until the crisis claimed the scalp of the storied Swiss banking outfit Credit Suisse that insiders started to take note.

In fact, despite the 167-year-old company facing a raft of scandals over the years, its demise shocked many observers. UBS’s emergency takeover of the firm was presaged by comments from the chair of the Saudi National Bank, who claimed that the Gulf state would not provide any further funding for the beleaguered corporation.

The upshot of the events of the last few weeks is that everyone – including investors, banks, and the government itself – has been put on a state of high alert.

Naturally, this has gotten some businesses previously considered “at risk” even more nervous than before.

For instance, Wells Fargo, one of the most famous banking names in the world, might just be looking over its shoulder right now. Its stock dropped precipitously after the demise of Silicon Valley Bank, with the market inflicting a 20% decline in share price since the beginning of March.

But not all banks are constituted the same – and there are reasons to think this could be the case with WFC.

Therefore, let’s dive deep into why Wells Fargo is a different proposition to its competitors – and whether that alone is enough to survive this critically significant juncture.

A Healthy Balance Sheet Is Key

Unlike many other banking catastrophes of late, the ongoing turmoil of 2023 stems more from a crisis of liquidity than it does from a lack of underlying capital.

To illustrate this, take the case of Silicon Valley Bank, whose problems weren’t born out of concerns for its dodgy business practices or poor loan-making decisions like those of the Great Recession.

No, the venture succumbed to a rapid squeeze on its short-term money reserves, with customers triggering a textbook bank run after confidence in the organization plummeted.

In fact, SVB was a well-run business. It posted a 57% improvement to its core fee income for fiscal 2022 and boasted of healthy credit metrics in its most recent January earnings report.

Ultimately, this demonstrates that if banks can cover an unexpected spike in withdrawals, they’re probably immune from the worst of this enduring calamity.

It’s lucky, then, that Wells Fargo is in just such a position.

To begin with, although its revenues for 2022 fell 6% to $73.8 billion, WFC saw its total deposits increase year-on-year from $835.7 billion to $883.1. The bank also registered a massive 26% annual increase to its net interest income at $45.0 billion, while its average loans outstanding grew 8% to $948.5 billion.

Crucially, the company’s liquidity coverage ratio is excellent at 122%, increasing 300 basis points from its level in 2021.

What’s more, notwithstanding that its total assets fell slightly to $1.89 trillion, only $510 billion of Wells Fargo’s deposits exceed the FDIC’s insurance limits.

And that point is vital: when Silicon Valley Bank went under, it had a staggering 94% of its domestic deposits not covered by the FDIC scheme – which no doubt contributed to investors and customers leaving the company in droves.

It’s Not All Good News For Wells Fargo

There are signs, however, that suggest WFC could soon run into trouble if interest rates continue to rise.

For example, the business has net unrealized losses of $8.13 billion on its available-for-sale securities and net unrealized losses of $41.5 billion on its held-to-maturity ones too. Worryingly, these numbers represent year-on-year increases of 357% and 11,300%, respectively.

Furthermore, deposit costs have skyrocketed this year, going from 0.02% in the fourth quarter of 2021 to 0.46% in the fourth quarter of 2022. It hasn’t helped either that non-interest expense spiked from $13.2 billion to $16.2 billion for the period ending December 31, 2022, or that annual non-interest income tanked from $42.7 billion to $28.8 billion.

And yet, it gets worse. Not only has the return on average tangible common equity been eaten away, but that most fundamental of performance indicators, net income, fell more than a third from $21.5 billion to just $13.2 billion.

Conclusion: Is Wells Fargo Bank In Trouble?

Given the alarming scale of WFC’s exposure to further interest rate rises, the company is somewhat insulated from this type of development.

It has $355 billion of high-quality liquid assets to protect against any untoward volatility in outflows, while its $127 billion of cash and cash equivalents easily covers any unrealized losses.

This should ensure that Wells Fargo is covered in the short term, meaning its long-term outlook is also pretty good.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.