Will Warren Buffett Sell Wells Fargo?

Will Warren Buffett Sell Wells Fargo?

Buffett reduced his position in the bank in the fourth quarter of 2019, and now the bank’s outlook is worsening.

Bram Berkowitz
Bram Berkowitz

(TMFBram)
May 12, 2020 at 8:50AM
After Berkshire Hathaway’s (NYSE:BRK.A) most recent investor day, I think it’s safe to say that no one really knows what Warren Buffett is thinking. The company and the “Oracle of Omaha” caught everyone off guard by revealing that it did not conduct any significant share repurchases in the first quarter — that it sold its entire stake in four major airline companies, and grew its pile of cash and short-term investments to a whopping $137.2 billion.

Buffett’s conservative gameplay in the first quarter begs another question: Will he make any moves on Wells Fargo (NYSE:WFC)? Buffett has owned the stock since 1990 and it’s been widely considered one of his favorite banks. But in recent years, the legendary investor has blasted the bank for its phony-account scandal in 2016, in which bank employees created two million fake bank accounts. Buffett also recently reduced his stake in Wells Fargo by nearly 15% in the fourth quarter of 2019. As the coronavirus pandemic continues to hamper the economy and the bank continues to face regulatory scrutiny, will Buffett do anything?

A Wells Fargo bank building

IMAGE SOURCE: GETTY IMAGES.

Outlook worsens for Wells Fargo

The big banks are all setting aside billions of dollars to prepare for loan losses resulting from social distancing measures that have essentially put the economy at a standstill. Those losses will eat into profits. The problem with Wells Fargo, as UBS analyst Saul Martinez said in a recent research note, is that it’s difficult to see how the bank will generate any significant earnings in the second quarter.

After the phony account scandal in 2016, the Federal Reserve placed an asset cap on the bank, limiting Wells Fargo to $1.95 trillion in assets. The asset cap is measured on a two-quarter daily average basis and must be below $1.952 trillion at the end of the quarter, according to Wells Fargo CEO Charles Scharf. On March 31, the cap was at $1.943 trillion .

So, Wells Fargo essentially has no more room to lend. That makes generating income particularly tough, because to generate any significant interest income while interest rates are at zero, banks need to lend a lot. The Fed has allowed Wells Fargo to make loans through the Paycheck Protection Program, but those will generate very little interest income and the bank must forfeit all fees it makes from the loans.

Now, I don’t think most banks are too concerned about lending right now because they have their hands full putting out fires from other existing loans and issuing PPP loans. But despite the effect of coronavirus, other large banks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) generated net interest income in the first quarter that was not too far off from what they produced in the first quarter of 2019.

Net interest income at Wells Fargo dropped by about a billion on a year-over-year basis. The bank also saw non-interest income drop significantly relative to its peers. This could be because of the asset cap, but Scharf said on the company’s recent earnings call that the bank was “not looking for NII (net interest income) growth, and I’m sure it will be down by some amount,” referring to net interest income from the first to second quarter .

Not enough reserves?


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