Wells Fargo looks unusually cheap, but investors fret mojo’s gone

After yet another scandal, it’s time for would-be Wells Fargo & Co. shareholders to decide: Is this a rare buying opportunity or has the bank lost its mojo?

Not since 2011 has Wells Fargo been so cheap relative to its U.S. competitors. For years, the stock commanded one of the industry’s highest premiums, as investors including Warren Buffett bet on management’s ability to avoid big blowups. But a bogus-account scandal last year and a car-insurance debacle that emerged last week are calling that into question.

The bank’s price-to-book ratio – which shows how investors value the firm’s assets – is now just 1.1 times that of the 24-company KBW Bank Index. That’s down from more than 1.5 in early 2016, before Wells Fargo’s scandals began erupting.

With new Chief Executive Officer Tim Sloan pledging to overhaul the firm’s culture and controls, might such a multiple return?

“That’s the debate that’s going on in the investment community,” said Ed Mills, an analyst at FBR Capital Markets. “What does Wells Fargo have to do to demonstrate to the investment community that they have learned or they’ve turned a page?”

Peter Gilchrist, a spokesman for the San Francisco-based lender, declined to comment.

Wells Fargo was long the envy of the industry. During the crisis it outmaneuvered Citigroup Inc. to buy weakened lender Wachovia Corp. It now operates a nationwide branch network, ranks as the biggest U.S. mortgage lender and generated almost $22 billion of profit in 2016. For a time, it was the world’s most valuable bank, before ceding that title last year.

The company has underperformed the KBW Index since September, when authorities said Wells Fargo opened what may be millions of accounts for customers without permission. The stock has climbed only 8.4 percent in the wake of those revelations. Meanwhile, the index has soared 33 percent. If Wells Fargo could catch up, it would be a boon for shareholders.

Instead, consternation has mounted.

Last month, the bank said it’s looking at whether any private information was mistakenly provided to an attorney as part of a lawsuit involving a former employee and his brother, who works at the firm. Then on July 27, the company said a review had found more than 500,000 clients may have unwittingly paid for car insurance attached to their auto loans. In many cases, drivers already had their own policies. Some borrowers struggled to keep up with their elevated bills, defaulted and had vehicles repossessed.

Wells Fargo discontinued the insurance program last year and plans to spend as much as $80 million making customers whole – giving thousands who lost their cars extra money “as an expression of our regret.” But some consumers already are suing.

“While the dollar amount is negligible, we believe the full cost may be significantly higher,” Piper Jaffray analysts led by Kevin J. Barker predicted in a note to clients on Friday. The latest snafu could ultimately prove costlier than last year’s fake-account scandal – a risk that could further weigh on stock price, he said.

Expenses from last year’s debacle already have snowballed. The bank has pegged customers’ damages at about $3.2 million. But the firm has spent at least $520 million on fines, remediation, consultants and litigation. It also uprooted a longstanding system for encouraging sales, which branch employees blamed for fueling abuses. The reputational harm may drag on business for years.

In the new scandal, there’s a danger that Wells Fargo will be forced to take a deeper look at what happened to car buyers before 2012 – the starting point of its review – just like it did with the account scandal, according to Glenn Schorr, an analyst at Evercore ISI.

“Given this issue is fresh off the block, it’s likely to be around for a while,” Schorr told clients in a note. It will “draw flies quickly,” he said, and could take a lasting toll on the stock.

Related Topics: Wells Fargo & Co.