Wells Fargo (WFC) core Q3 EPS of $.84 was well below Wall Street expectations of $1.03 mainly due to a -$.20 charge for litigation accrual due to regulator’s investigation into pre-crisis mortgage securities activities. For the quarter, net interest income was flat. Despite headline risks, WFC is on firm footing as the balance sheet is strong and loan quality is excellent. Believe that weakness in earnings is temporary and WFC remains a core holding in finance sector.
Current Price: $53.8 Price Target: $56
Position Size: 3.4% Trailing 12-month: -1.3%
Highlights:
- Strong capital position
- Common Equity Tier 1 Ratio of 11.8%
- ROE 9.06% (Return on tangible equity 10.79%)
- Returned $4.0bil to shareholders through dividends and share repurchases. Increased share repurchases by 59% for the quarter which is shareholder yield of almost 6%.
- Strong balance sheet – Net charge offs and Nonperforming loans at historic lows.
- Noninterest revenue down -9% yoy – 46% of revenue
- Investment banking +11% was the lone bright spot, besides gains from debt securities and equity investments
- Mortgage banking fell -37%
- Noninterest expenses were up 8% YoY
- Net interest income was down slightly yoy
- Average loans -1% YoY to $952.3b
- Commercial loans were up $3.7b
- Consumer loans were down $13.1b lead by a reduction in auto loans due to tighter credit standards.
- Strong deposit growth of 4% YoY.
- Valuation is fair on depressed earnings WFC now trades at 13.1x P/E (= long term avg) and 1.5x BV. WFC is targeting $4.0b in cost savings over the next two years, which is an aggressive target.
WFC Thesis:
- Best franchise in banking due to disciplined loan writing and quality mortgage underwriting
- Large deposit base that provides low cost funding
- Strong capital ratios put WFC in a good position to be opportunistic, invest for the long-term and return capital to shareholders
- Fair valuation and potential for earnings rebound in 2018