Warren Buffett and his company Berkshire Hathaway (BRK.A -0.20%)(BRK.B -0.18%) recently disclosed that they sold off their last remaining holdings of Wells Fargo (WFC 2.21%) in the first quarter of 2022. Berkshire had significantly reduced its position in Wells Fargo in recent years, so this has been expected. But the elimination of Wells Fargo marks the end of an era, as Berkshire first began investing in the company more than 30 years ago.
Should investors follow Buffett and Berkshire’s lead and exit the stock? Let’s take a look.
What led to the sale?
It’s pretty clear that Buffett and Berkshire exited Wells Fargo because of the years of dealing with the fallout of the bank’s phony accounts scandal, in which employees at Wells Fargo opened credit card and bank accounts on behalf of thousands of customers without their consent. When the scandal officially came to light around 2016, it rocked the banking world.
Wells Fargo has been severely punished for its actions, being forced to pay billions in fines and forced to comply with numerous consent orders from regulators. Even after doing a lot of work to remedy the situation, Wells Fargo is still operating under nine outstanding consent orders from various regulators.
Then in 2018, the Federal Reserve hit the bank with arguably the most punitive regulatory action in all of banking when it implemented an asset cap on the bank. The cap essentially prevents Wells Fargo from growing its balance over $1.95 trillion in assets. This has cost the bank billions in profits over the years. Now more than four years after being implemented, the asset cap remains, although Wells Fargo has made progress in addressing the Fed’s concerns.
Wells Fargo had long been considered one of Buffett’s favorite stocks. While he has criticized the bank for the scandal, he largely stuck with the bank. However, Berkshire began trimming its stake in Wells Fargo leading up to the pandemic, and once the pandemic hit, the company sold a lot of its bank holdings, including the bulk of its position in Wells Fargo. Berkshire held a small remnant of shares for a few quarters before finally exiting its position in the first quarter of 2022.
How is Wells Fargo doing?
It took the bank a while to get on sound footing, and shares of Wells Fargo fell to below $22 per share during the heart of the pandemic (shares trade around $42 now). However, the bank’s hire of Wall Street veteran Charlie Scharf as CEO in 2019 looks to have been a good move.
Scharf and his team went to work, diving into the lengthy process of trying to repair the bank’s regulatory infrastructure in order to ensure that another event like the phony-accounts scandal could never happen again. Scharf has hired more compliance officers at the bank, created a more formal and streamlined internal structure for reviewing regulatory issues, and also new departments to address customer-facing issues, such as the bank’s new Office of Consumer Practices. Early in 2021, media outlets reported that the Fed had approved Wells Fargo’s proposal for a new risk-management and governance structure, sending shares rising as many investors believed this was a key step toward asset cap removal. But the asset cap remains in place, and investors are still unclear when it will be removed.
Scharf has also pleased investors from an operational standpoint. He worked on making Wells Fargo a more simple operation that focused on its core U.S. franchise, selling several divisions of the bank. Scharf has also worked to grow the bank’s credit card and investment banking businesses. Finally, Scharf has been working to improve efficiency at the bank with a multi-year plan to cut $10 billion of annual expenses. Early results have been promising and rising interest rates have also helped Wells Fargo on the revenue side of the equation.
Should you buy or exit Wells Fargo?
I certainly have all the respect in the world for Buffett and Berkshire, but I am going to respectfully disagree with them when it comes to Wells Fargo because I think the stock is a buy. Trading at less than 130% to its tangible book value, or net worth, and about 10 times forward earnings, the stock looks intriguing. The efficiency initiatives and rising interest rates should help Wells Fargo grow earnings in the near term, and I would eventually expect the asset cap to get removed at some point, which would finally allow the bank to go on the offensive and with a much better operation in place.