Last week, Wells Fargo (WFC) reported Q4 EPS of $1.21 roughly in-line with estimates. Earnings were pulled down a bit by the market’s Q4 weakness as was the case for peers. In the call, management pushed back the expected asset cap release date from mid-2019 to end of 2019. On the plus side, Wells continues to improve its culture and is aggressively buying shares, having reduced shares by 3% in the past quarter.
Current Price: $50.29 Price Target: $56
Position Size: 2.8% Trailing 12-month return: -20.7%
Highlights:
· Wells is a return of capital story with over $20b in excess capital.
o Dividend yield of 3.7% ~ 50 bips above peers
o Last quarter purchased 3% of shares spending $6.8B
o For 2018, WFC has a shareholder yield of 9.7% (3.2% dividend and 6.5% share buyback)
- Ongoing transformation of culture – Wells has made a lot of progress
- Replaced former Chairman, John Stumpf with CEO, Tim Sloan, and added CFO Elizabeth Duke, a former Fed member, as independent chairman.
- Named 6 new independent directors
- Expecting the Federal Reserve to lift balance sheet asset cap restriction at end of 2019
- On 4/20/18 Wells reported a $1b settlement with OCC and CFPD relating to forced car insurance and mortgage fees.
- Recent moves to improve firm’s standing with employees
- Increased base minimum hourly wage to $15.00 an increase of 11%
- Increased 401k and profit sharing programs
- Increased stock incentive compensation
- Recent improvements to help customers
- Overdraft rewind, zero-balance alerts, debit card on/off capability, and P2P payments
- Wells still needs to settle with DOJ over residential mortgage policies dating back to the financial crises. Estimates place the settlement at $2b, but Wells has already set aside reserves of $3.2b
- Additional lawsuits exist for overdraft fees, foreign exchange, mortgage fees, improper account closing and other smaller suits. Wells is not out of the woods, yet.
- Plans to spend 2% of earning to philanthropy (up from 1.3%)
- Strong capital position
- Common Equity Tier 1 Ratio of 11.7%
- ROE 12.9% (Return on tangible equity 15.4%)
- Returned $8.8b to shareholders through dividends and share repurchases for a shareholder yield of over 6.3%!
- Solid credit quality – Nonperforming assets down from $8.3b in 4Q17 to $7.0b in 4Q18 as company continues to improve the balance sheet.
- Operational results
- Noninterest revenue down -14% YoY hurt by Q4 market downturn and weak results in mortgage banking. Quarter results showed modest gains from sale of securities.
- Noninterest expense down -21% in good cost control. Wells expect costs to fall 11% over the next 2 years.
- Net interest income up 3% YoY loans up $6.9b
- Deposits down 3% yielding 55 bips with low beta (33) to rising rates
- Net interest margin stable at 2.94%
- Valuation
- Valuation is below 5-year average at 12.1 P/E and 1.3 P/B, having bounced off a 5-year low in December of 11 P/E and 1.2 P/B
- Yield and share buybacks provide strong support
WFC Thesis
- Best franchise in banking due to disciplined loan writing and quality mortgage underwriting
- Large deposit base that provides low cost funding
- Strong capital ratios put WFC in a good position to be opportunistic, invest for the long-term and return capital to shareholders
- Company is working hard to improve culture and repair image
($WFC.US)
John R. Ingram CFA
Managing Director
Asset Allocation and Research
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109