Wells Fargo 3Q numbers - a mixed bag

Three major banking stocks reported their results on Friday, Citi and JP Morgan first, and then the one that we are most interested in, Wells Fargo had numbers. Now Wells have had more than a tough time lately, the fall out from the ghosting accounts and very unsavoury practice of created unknown accounts (for the client) in order to earn commissions, has resulted in a large shedding of the workforce and more importantly, the eventual ejection of the CEO and chair, see Stumpf steps down.

One of the reasons for owning the stock was that their practices were not supposed to mirror those of the investment banks in the era leading up to the financial crisis. Since then, the banks have been fined large pots of money for their activities. The most recent of which is the Deutsche Bank fine. As of June 2016, banks had paid out around 160 billion Dollars. Some would say that is a lot of money, some would suggest that the regulators haven't been tough enough, it depends which end of the spectrum you sit.

The fall out of the recent crisis is as of yet unknown, the bank is likely to lose quite a few state banking relationships, and very many regional ones too. They are being punished by the public for their behaviour and that is right, if the bonus pool shrinks as a result of the behaviour, and the shareholders were not on top of this, then all must suffer. Banking is however an ancient business, it has always been around and likely will always be around. Retail and business customers need a safe custodian of their funds and need access to finance. A definite must. Retail customers in order to grow their own personal balance sheets (that has a time horizon), businesses to continue to grow their assets, that is open ended of course.

Here are the results: Diluted EPS of $1.03; Revenue Up 2 Percent from Prior Year. The bank really is a beast. Revenues of 22.3 billion Dollars per quarter, 5.64 billion Dollars net income, net interest margin is where all banks have been struggling, that is 2.82 percent. Down from the two prior quarters. Average loans are approaching one trillion Dollars, 957.5 billion as at the end of the their third quarter, average deposits (notwithstanding the low interest rate) is 1.261 trillion Dollars, total deposits clocked 1.275 trillion Dollars. With a capital T. Trillion. The loan books is split roughly half and half, with commercial loans at 496 billion Dollars and retail customers (they call it consumers) at 464 billion Dollars. Total assets number 1.942 trillion Dollars. Book value is 6 percent higher year on year, at 35.81 Dollars, the stock trades at 1.25 times book.

In their retail brokerage business, they have client assets of 1.5 trillion Dollars, of that 458 billion Dollars are advisory assets. And employees that service this lot? 268800 people at the end of the reporting period, one percent higher than the prior year. Notwithstanding the fact that a few thousand people have been let go, they still continue to add.

All that matters is the performance of the share price, for 95 percent of retail investors. Year-to-date the stock is down 17.75 percent. One year it is "less bad", down nearly 15 and a half percent. Over that time, the broader market S&P 500 is up nearly five percent. So the underperformance has been ugly, in part the reason why financials and banks have underperformed is that they rallied hard ahead of what was supposed to be a higher trajectory on the interest rate cycle. As of now, we haven't got a hike this year. Until then, expect the stock to trade sideways. Hold the stock!