Wells Fargo's Growth Rate Is Slowing Down

9/13/17

By John Maxfield, MotleyFool

For investors in Wells Fargo (NYSE:WFC), one of the most important questions right now facing the bank is whether, in the wake of its fake-account scandal, it can continue producing the same type of returns and growth that made it a market darling in the not-so-distant past.

The early indications aren't good. You can see this in the chart below, which compares the year-over-year growth rate of Wells Fargo's book value per share to the average of the six largest banks in the country.

A bar chart showing the growth in Wells Fargo's book value per share compared to the average of the six biggest banks in the United States.

DATA SOURCE: YCHARTS.COM. CHART BY AUTHOR.

Prior to the third quarter of last year, Wells Fargo would almost invariably grow faster each quarter than its largest rivals. Over the three preceding years, there was only one quarter out of 12 in which this wasn't the case.

Since the third quarter of 2016, however, everything has changed. That was when the Consumer Financial Protection Bureau disclosed that Wells Fargo's unreasonably high sales quotas led thousands of its employees to create millions of fake accounts for customers.

In the four quarters since then, including the quarter in which the scandal was disclosed, Wells Fargo's book value per share growth has lagged its megabank peers every quarter. Most recently, in the three months ended June 30, Wells Fargo's book value per share grew only 3.1% compared to the average among the six largest banks of 4.9%.

The Wells Fargo Center looms over downtown Portland, Oregon.

THE WELLS FARGO CENTER LOOMS OVER DOWNTOWN PORTLAND, OREGON. IMAGE SOURCE: GETTY IMAGES.

It's impossible to say for sure at this point whether this is a sign of things to come for Wells Fargo or, rather, just a temporary setback. On the one hand, elevated expenses associated with the scandal's legal fees will eventually dissipate. But, on the other hand, Wells Fargo's decision, which it had no choice but to make, of scrapping its former in-branch sales strategy, could indeed throttle the bank's long-term growth.

Historically, one of the principal levers that Wells Fargo pulled on to fuel its growth has been cross-selling products to existing customers. If you have a checking account and walked into a branch, the bank's tellers would try to sell you a credit card or savings account. But Wells Fargo abandoned sales quotas in the wake of its scandal, causing new account openings to fall on a year-over-year basis by 30% to more than 40%, depending on the account type.

The net result is that, while Wells Fargo and loyal shareholders like Warren Buffett continue to claim that the bank hasn't lost any of its long-term mojo, there's a growing amount of quantitative data to suggest otherwise.

Newly released! 10 stocks we like better than Wells Fargo
On September 8, investing geniuses David and Tom Gardner revealed what they believe are the ten best stocks for investors to buy right now… and Wells Fargo wasn't one of them! That's right -- they think these 10 stocks are even better buys.

And when the Gardner brothers have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

It's on us. Share your news here.

Submit your stories and articles to citybizlist today.