Why Did Wells Fargo Shares Tumble on Thursday?

By John MaxfieldMarketsFool.com

Shares of Wells Fargo (NYSE: WFC) led bank stocks lower on Thursday, ending the day more than 3% down after the bank reported first-quarter earnings that narrowly missed expectations on the top line but exceeded the consensus estimate on the bottom line.

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All told, the nation's third biggest bank by assets earned $5.1 billion, or $1 per share, on $22 billion in revenue. Analysts had expected earnings per share of $0.97 on a $22.3 billion top line.

Data source: Wells Fargo, The Wall Street Journal.

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Wells Fargo has been the only big bank thus far this earnings season to report a year-over-year decline in first-quarter earnings. While its bottom line fell by less than 1%, or $29 million, the other two big banks to report earnings on Thursday notched substantial increases, with JPMorgan Chase and Citigroup both seeing a 17% year-over-year growth in quarterly profits.

One reason JPMorgan Chase and Citigroup saw their earnings climb so much was trading revenue, which was up by double-digit percentages at the two New York City-based banks. Wells Fargo didn't see the same benefit, as it has a much more modestly sized capital markets business.

In addition, Wells Fargo is still in the throes of recovering from its fake-account scandal, in which thousands of its employees improperly opened millions of accounts for unwitting customers who either didn't need, want, or even know about the new accounts.

Since the scandal was revealed by the Consumer Financial Protection Bureau in September, Wells Fargo has paid hundreds of millions of dollars in fines and settlements, promoted a new CEO, suffered considerable reputational harm, and eliminated product sales goals for branch employees.

Image source: The Motley Fool.

The change to Wells Fargo's sales culture is having a particularly pronounced effect on new account openings. In March, consumer credit card applications at the California-based bank were down 42% on a year-over-year basis. Not far behind, the number of new checking accounts that were opened last month fell 35%.

"Wells Fargo continued to make meaningful progress in the first quarter in rebuilding trust with customers and other important stakeholders, while producing solid financial results," said CEO Tim Sloan in prepared remarks.

Ultimately, though, given that bank stocks declined across the board on Thursday, even hitting banks like JPMorgan Chase and Citigroup, it seems safe to say that Wells Fargo's comparatively downbeat performance isn't solely responsible for the 3% drop in its share price.

The broader downturn in bank stocks last week likely has to do instead with valuations. Because the run-up in bank stocks over the past five months has sent share prices in the industry up 20% to 30%, investors expect a lot from banks to justify their current valuations right now. And at least by the looks of it, banks have thus far come up short in the first quarter.

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John Maxfield owns shares of Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.