EUR 850.00 For Business Accounts Only

Morningstar | Wells Fargo Continues To Be Hurt By Low Mortgage Income, Asset Cap Delays Add to Disappointment. See Updated Analyst Note from 15 Jan 2019

Wide-moat Wells Fargo continued to wade through multiple issues in the quarter. The bank, as expected, recorded another $175 million legal accrual related to a settlement with the Attorneys General of all 50 states (as well as the District of Columbia) with regards to many of the already disclosed issues the bank is facing. There were a number of other one-time items in the quarter, making overall numbers somewhat noisy. That being said, net income was down roughly 1.5% compared with the same quarter last year, with share repurchases helping to lift EPS to $1.21, up from $1.16. The return on average tangible common equity did improve to 15.4%, and despite the weaker revenue growth, management was able to get the expense base to the lower end of their target range. We like the improving returns on equity, the strong growth in card and C&I loans, and the decreasing expense base, however, the announcement that the asset cap will stay in place for all of 2019 was a significant negative. We still believe the bank has meaningful room to improve returns on equity with further expense management, and we do not believe the bank needs significant revenue growth to improve its returns, but it will be a bumpy ride to get there as long as the bank remains under the regulatory microscope. We are currently modelling almost no revenue growth through 2021. Based on our updated forecasts, we are lowering our fair value estimate to $65 from $67. The bank was able to repurchase roughly 3% of shares outstanding in the quarter, which we believe is value-accretive, and the bank has a dividend yield of over 3.5%, which should make it a little easier to wait for the story to play out.

There were some positive numbers from the quarter. Management met its previous expense guidance, and even reiterated their guidance for 2019 and 2020. Management also further reiterated that they do not need revenue growth in order to hit a roughly 17% return on tangible equity. Digital active customers were up, as were active general purpose credit card accounts. Further, primary consumer checking customers remained steady during the quarter, and satisfaction surveys showed continued improvements. We believe these numbers show some support that Wells’ underlying community banking business is doing fine. Also, if you take out the sale of the insurance business, lower trading revenue, as well as the cyclically low mortgage revenue, the lack of fee growth was not as bad as it might initially seem. Wells is more exposed to the housing market and mortgage fees, and as such is being negatively affected more than peers, but this part of the business is cyclical and will eventually swing back.

We believe Wells continues to manage its balance sheet admirably given the asset cap, using industry wide declines in home equity loans, discipline in CRE and auto, and further sales of Pick-a-Pay loans to allow ample room for growth within C&I and cards. The bank is currently about $50 billion under the asset cap. Credit quality remained pristine, as the net charge-off ratio and provisions remained range-bound, and nonperforming assets declined in the quarter.