Wells Fargo & Company (WFC)

Equity
US
Financial Services

RISK

RETURN

Key risk factors

Strong trading liquidity

Low default risk

Modest price volatility

Key return factors

Good growth

Decent dividends

Somewhat favourable analyst view

Company profileWells Fargo & Company, a diversified financial services company, provides banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally. It operates through four segments: Consumer Banking and Lending; Commercial Banking; Corporate and Investment Banking; and Wealth and Investment Management. The Consumer Banking and Lending segment offers diversified financial products and services for consumers and small businesses. Its financial products and services include checking and savings accounts, and credit and debit cards, as well as home, auto, personal, and small business lending services. The Commercial Banking segment provides financial solutions to private, family owned, and certain public companies. Its products and services include banking and credit products across various industry sectors and municipalities, secured lending and lease products, and treasury management services. The Corporate and Investment Banking segment offers a suite of capital markets, banking, and financial products and services to corporate, commercial real estate, government, and institutional clients. Its products and services comprise corporate banking, investment banking, treasury management, commercial real estate lending and servicing, equity, and fixed income solutions, as well as sales, trading, and research capabilities services. The Wealth and Investment Management segment provides personalized wealth management, brokerage, financial planning, lending, private banking, and trust and fiduciary products and services to affluent, high-net worth, and ultra-high-net worth clients. It also operates through financial advisors. Wells Fargo & Company was founded in 1852 and is headquartered in San Francisco, California.

Valuation: Fairly valued

Multiple

TTM

NTM

P/E

11.30

11.80

PEG

0.20

P/B

1.20

1.00

P/CR

2.80

P/RIBPT

7.50

P/IBPT

12.90

Based on key historical and expected multiples, the stock is fairly valued relative to its peers. Specifically, the stock is fairly valued on P/E, Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Decent

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 30ppts and its growth decelerated by 4ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is mildly favourable.

Analyst view: Somewhat favourable

The average target price is 64 and suggests 7% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 70.0. This translates into 17% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 48.8. This is equivalent to 18% downside potential in the worst case.

Profitability: Average

RoE

Wells Fargo & Company reported a return on equity (RoE) of 10.0% in the last 12 months, down from 10.1% in FY23. The market consensus projects a RoE of 9.2% in FY24, again behind the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 1.0% in the last 12 months, a decrease from 1.0% in FY23. The market analysts predict that RoA will be 0.9% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) grew to 76.3%, above the peers. The consensus estimate for FY24 for CI is 68.1%, again above of the peers.

Growth: Good

EPS

Core revenue

IBPT

RIBPT

WFC reported revenue of USD 73 716mn in the last 12 months, down 1% from FY23. The institution earned USD 26 426 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), a decline of 1% from FY23 At the same time, the dynamics of a more stable income, as measured by recurring income before provisioning and taxes (RIBPT), were drastically different. EPS fell 1% from FY23 to USD 4.83. Market expects EPS to reach USD 5.01 in FY24.The core revenue has been growing very slowly over the last several years (middle negative), while IBPT growth has been steady. This all contributed to very fast EPS growth (strongly positive). The RIBPT trend is similar to that of IBPT. We emphasize the highly volatile dynamics of IBPT, EPS, and RIBPT. On the positive side, core revenue dynamics is very stable.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are unclear. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Low

The solvency (credit quality) of WFC is high. The credit profile rests on (a) a moderate capital position, (b) sufficient asset quality, (с) a very strong corporate governance framework, (d) moderate earnings power and cost efficiency, and (e) its good liquidity profile.

Volatility: Modest

In normal market circumstances, WFC is as volatile as an index. Put differently, without outstanding market volatility or shocking company news, the stock's price will remain relatively stable. The stock's losses on its worst days (less than 1-5% of the time) will range from limited to mild. Finally, it may be affected by inherently volatile sector.

Stress-test: Modest

In highly turbulent market conditions, WFC is as volatile as an index. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low. At the same time, due to inherently volatile sector, its maximum losses could be limited.

Selling difficulty: Very low

WFC boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.