Comparing the trend in Wells Fargo’s (NYSE: WFC) stock over recent months with its trajectory during and after the Great Recession of 2008, we believe that the stock can potentially gain 25% once fears surrounding the coronavirus outbreak are put to rest. Our conclusion is based on our detailed comparison of Wells Fargo’s performance against the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Wells Fargo Stock Fare Compared With S&P 500?
The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. Between January 31st and March 30th, WFC stock has lost 36% of its value (vs. about 21% decline in the S&P 500). A bulk of the decline came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.
Wells Fargo’s Stock Has Fallen Considerably Because The Situation On The Ground Has Changed
Wells Fargo has a sizable loan portfolio of around $399 billion in community loans and $456 billion in commercial loans (as per 2019 data). Further, the community and commercial banking segments together generated around 72% of the bank revenues in 2019, which implies that the bank is heavily dependent on the two segments. On the other hand, we expect that businesses could suffer losses due to the combined effect of lower consumer demand, supply chain disruption, and global economic slowdown. This could impact the loan repayment capacity of both commercial and community banking customers, exposing the bank to the possibility of sizable losses. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations. Similarly, the lower asset valuations would mean a drop in Assets under Management– resulting in a decline in investment management revenues.
We believe Wells Fargo’s Q1 and Q2 results will confirm this reality with a drop in both community and commercial banking revenues. If signs of coronavirus containment aren’t clear by the Q1 earnings in April, it’s likely Wells Fargo’s stock along with the broader market is going to see a continued drop when results confirm palpable reality.
But Wells Fargo Stock Witnessed Something Similar During The 2008 Downturn
We see WFC stock declined from levels of around $26 in October 2007 (the pre-crisis peak) to roughly $9 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 65% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.
However, WFC recovered strongly post the 2008 crisis to about $21 in early 2010 – rising by 124% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Will Wells Fargo’s Stock Recover Similarly From The Current Crisis?
Keeping in mind the fact that WFC stock has fallen by 36% this time around compared to the 65% decline during the 2008 recession, we can expect it to recover by roughly 25% to levels of $37 once economic conditions begin to show signs of improving. This marks a partial recovery to the $46 level WFC stock was at before the coronavirus outbreak gained global momentum.
That said, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyses expected recovery time-frames and possible spread.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Wells Fargo’s multinational peers including Goldman Sachs and Morgan Stanley. The complete set of coronavirus impact and timing analyses is available here.
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