3 Reasons WFC is Risky and 1 Stock to Buy Instead

Wells Fargo trades at $84 per share and has stayed right on track with the overall market, gaining 7.8% over the last six months. At the same time, the S&P 500 has returned 5.8%.

Is there a buying opportunity in Wells Fargo, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Wells Fargo Not Exciting?

We're swiping left on Wells Fargo for now. Here are three reasons why there are better opportunities than WFC and a stock we'd rather own.

1. Net Interest Income Points to Soft Demand

Markets consistently prioritize net interest income growth over fee-based revenue, recognizing its superior quality and recurring nature compared to the more unpredictable non-interest income streams.

Wells Fargo’s net interest income has grown at a 1.8% annualized rate over the last five years, much worse than the broader bank industry and in line with its total revenue.

2. Net Interest Margin Dropping

Net interest margin represents how much a bank earns in relation to its outstanding loans. It’s one of the most important metrics to track because it shows how a bank’s loans are performing and whether it has the ability to command higher premiums for its services.

Over the past two years, Wells Fargo’s net interest margin averaged 2.8%. Its margin also contracted by 36.7 basis points (100 basis points = 1 percentage point) over that period.

This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean Wells Fargo either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.

3. High Interest Expenses Increase Risk

Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.

Over the last two years, Wells Fargo has averaged a Tier 1 capital ratio of 12.6%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.

Final Judgment

Wells Fargo isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 1.6× forward P/B (or $84 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward our favorite semiconductor picks and shovels play.

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