Why do I tie up my cart at Wells Fargo
You’ve heard or seen me mention quite often the story of the Wells Fargo (WFC) turnaround under the leadership of President and CEO Charles Scharf.
Scharf has been hampered since taking the job in September 2019 by the bank’s reputation and the Fed’s imposition of an asset cap of $ 1.95 trillion following the fake scandal. accounts, not to mention the start of a global pandemic. Periodically, Scharf set out to change the culture and cut expenses. Slowly it is now becoming evident that there may be a light at the end of the long tunnel on this shore.
In the banking industry, the “efficiency ratio” is the measure that measures operating expenses as a percentage of revenue generation. This is how investors assess how well a bank operates “lean and medium”. For the second quarter released Wednesday morning, Wells Fargo operated with an efficiency ratio of 66%, down from 77% a quarter earlier. That’s a lot of progress in three months.
The light at the end of this tunnel may or may not be so close, but we can see it from here. The first time in a long time.
In the second quarter, Wells Fargo reported earnings of $ 1.38 a share, crushing estimates which, for the most part, were less than a dollar. Revenue generation reached $ 20.27 billion, beating Wall Street estimates of over $ 2.5 billion, and good for year-over-year growth of 10.9%.
Similar to other banks such as JPMorgan Chase (JPM) and Bank of America (BAC), Wells Fargo released much of the money ($ 1.64 billion) from reserves set aside last year in view of pandemic loan losses that never materialized. This greatly improved profitability. On that note, a year ago, for the second quarter of 2020, WFC reported a loss of $ 0.66 per share, so it was a quarter of a positive reversal comparatively.
Unfortunately, like other big banks, loan growth has been difficult, going from $ 971.3 billion a year ago to $ 854.7 billion, while deposits have increased from $ 1. $ 39 trillion to $ 1.44 trillion. That left net interest income at $ 8.8 billion, stable sequentially, but down from $ 9.89 billion a year earlier. The net interest margin decreased to 2.02% from 2.05% for the first quarter and 2.25% for the second quarter of 2020.
The plan has always been to reduce what was the bank’s annual spending base of $ 54 billion over several years. There has been talk that Wells Fargo could recognize up to $ 3.7 billion this year. This is where Scharf has made the most progress. The branches have closed. Office space has been reduced. Non-essential businesses are sold and unfortunately some people have lost their jobs. Membership declined by approximately 5,000 for the three-month period.
Readers will see the stock go from a low of $ 20.76 last October to a high of $ 48.13 last May, registering a 132% rise in that time frame. A 38.2% Fibonacci retracement would take the shares back to around $ 37.62.
A funny thing happened on the way.
At first glance, I thought I saw a basic pattern consolidating after the May peak. Zooming in, however, I think I see a closing pennant, as support has moved from $ 41.50 to $ 42 and the 21-day Exponential Moving Average (EMA) has formed short-term resistance.
I think Wells Fargo is gearing up for an explosive move.
Recall, explosives for WFC would cost a few dollars, not $ 10 or $ 20. Yes, theoretically the move could drop to the Fib level below $ 38. However, I think the $ 4 21-day EMA and $ 45 50-day simple moving average (SMA) line up either as a brick wall or as a catalyst.
I am long the stock. My target price is $ 49. Right now, the $ 37.50 WFC puts are worth around $ 0.70. It sounds like a worthy sale to me.
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