3 Reasons WFC is Risky and 1 Stock to Buy Instead

Since June 2020, the S&P 500 has delivered a total return of 102%. But one standout stock has more than doubled the market - over the past five years, Wells Fargo has surged 212% to $79.01 per share. Its momentum hasn’t stopped as it’s also gained 10.1% in the last six months, beating the S&P by 9.1%.

Is now the time to buy Wells Fargo, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Wells Fargo Not Exciting?

We’re glad investors have benefited from the price increase, but we're swiping left on Wells Fargo for now. Here are three reasons why WFC doesn't excite us and a stock we'd rather own.

1. Net Interest Income Points to Soft Demand

Net interest income commands greater market attention due to its reliability and consistency, whereas non-interest income is often seen as lower-quality revenue that lacks the same dependable characteristics.

Wells Fargo’s net interest income has grown at a 5.8% annualized rate over the last four years, worse than the broader bank industry. Its growth was driven by an increase in its net interest margin, which represents how much a bank earns in relation to its outstanding loans, as its loan book shrank throughout that period.

2. Low Net Interest Margin Reveals Weak Loan Book Profitability

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, we can see that Wells Fargo’s net interest margin averaged a weak 2.8%, reflecting its high servicing and capital costs.

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 doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 1.5× forward P/B (or $79.01 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Like More Than Wells Fargo

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

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