Wells Fargo (NYSE: WFC) In Serious Trouble As Dividend Slashed

In the world of public companies, there are few more ominous signs management can give to shareholders than the cutting of a dividend. And with an 80% cut on Tuesday as part of their Q2 results, Wells Fargo (NYSE: WFC) management was issuing a warning as much as they were issuing a quarterly report.

Unsurprisingly, the results that came out in the report only served to justify the drastic cut, with revenue and EPS both missing analyst expectations. The former came in a full 17% lower year on year which is not the kind of double-digit percentage move investors are looking for. A much wider than expected loss was compounded by the company more than doubling their Q2 credit loss reserves for bad loans compared to Q1.

Underestimated Economic Downturn

Even with many stocks comfortably undoing most of last quarter’s damage and many more already at fresh all-time highs, Wells Fargo is trailing far behind and coughing up others’ dust. CEO Charlie Scharf gave a hint to the doom and gloom sentiment in their San Francisco headquarters yesterday when he said "our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.” Considering that many companies are in fact saying the opposite, that they overestimated the severity of the economic downturn, remaining shareholders have to be questioning their positions this week.

At one stage shares were trading down 8% from Monday’s close and while they managed to cut that daily loss in half by the close of Tuesday’s session, it’s hard to see results and comments like this inspiring much confidence in the long side. Indeed, comments from analysts across the board confirmed this.

Evercore analyst John Pancari noted how “Wells appears to be ripping off the Band-Aid on capital adequacy actions and loan loss reserve build — both of which we believe positions the bank well to face upcoming COVID-related stress”. Interestingly, he suggested that in the long run, notwithstanding the short term pain, these moves may be beneficial. Ken Usdin from Jeffries was also happy to see their credit reserves being bolstered but bemoaned the fact that it was falling margin and falling net interest income and fees that were the primary drivers behind the deeper than expected losses. KBW's Brian Kleinhanzl was a little more blunt when he said "overall there were not many positive data points to hang your hat on.”

JPMorgan and Citi Manage Growth

What will make this all the more bitter of a pill to swallow for Wells Fargo is that other banks are performing well at the same time that they’re struggling. JPMorgan (NYSE: JPM) also reported earnings yesterday which beat analyst expectations and showed revenue actually growing more than 14% year on year. Citigroup’s (NYSE: C) Q2 earnings were out yesterday as well and they also managed to beat the consensus with revenue up 5% compared to the same time last year.

The bolstering to credit reserves that were seen across the board in these reports does not bode particularly well for the broader economy. While there are many stocks making hay during the COVID pandemic, longer-term moves like the increase of loss provisions suggest that Wall Street isn’t totally buying the quick and complete recovery that many are touting.

Wells Fargo shares are now trading 30% lower than their June highs, which was the peak of their post Q1 recovery. At yesterday’s worst point, shares were only 5% off their March lows and back trading not only at 2010 levels but also at 1999 levels. With the company’s first quarterly loss since the Great Recession officially on the record and the legacy of the 2016 fake accounts scandal still hanging over them, don’t expect a miraculous recovery anytime soon.