WFC Details

Wells Fargo & Company (NYSE: WFC) is a diversified financial services company with around $1.9 trillion in assets. The Company provides banking as well as investment and mortgage products and services, and consumer and commercial finance services. It operates through its four reportable segments that include Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth & Investment Management.

Solid Performance in Q2FY21 (For the Period Ended 30 June 2021)

• It has recorded an 11% decline in net interest income owing to the impact of lower interest rates along with the effect of lower loan balances, higher mortgage-backed securities premium amortization.
• Non-interest income, however, grew by 37% supported by increased performance in its affiliated venture capital and private equity businesses and mortgage banking business.
• Provision for credit losses reduced $10.8 billion as it included a reduction of $1.6 billion in the allowance for credit losses owing to the sustained improvements in the economic environment. Q2FY20 included an $8.4 billion rise in the allowance for credit losses.
• Average loans reduced by 12% to $854.7 billion, while, the average deposits increased by 4% to $1.4 trillion.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Declared Dividends on Preferred Stock

The company, on 20 August 2021, has declared dividends on 10 series of preferred stock that includes a quarterly cash dividend of $18.75 per share on its 7.50% noncumulative perpetual convertible class A preferred stock as well as $320.31 per share on its 5.125% noncumulative perpetual class A preferred stock and $365.63 per share on its 5.85% fixed-to-floating noncumulative perpetual class A preferred stock.

It has also declared dividends of $414.06 per share on its 6.625% fixed-to-floating noncumulative perpetual class A preferred stock, $343.75 per share on its 5.50% noncumulative perpetual class A preferred stock, $351.56 per share on its 5.625% noncumulative perpetual class A preferred stock, $296.88 per share on its 4.75% noncumulative perpetual class A preferred stock, $293.75 per share on its 4.70% noncumulative perpetual class A preferred stock, $273.44 per share on its 4.375% noncumulative perpetual class A preferred stock and $141.67 per share on its 4.25% noncumulative perpetual class A preferred stock.

The payment date of the dividends is on 15 September 2021.

Recent Update

As per the press release dated 9 September 2021, WFC has confirmed the two developments associated with its risk management and regulatory work. The enforcement action was issued by the Office of the Comptroller of the Currency (OCC) against the company with respect to loss mitigation practices in the bank’s Home Lending business along with a civil monetary penalty associated with those loss mitigation practices and inadequate advancement in addressing requirements under the OCC’s April 2018 Compliance Risk Management and Customer Remediation consent order.

The company updated that developing an appropriate risk and control infrastructure continues to remain its highest priority and the OCC’s actions reflect to work and it will continue to do to address significant, long-standing deficiencies.

Besides, it has also stated that the consent order issued by the Consumer Financial Protection Bureau (CFPB) in September 2016 vis-à-vis the bank’s retail sales practices had expired.

Key Metrics

WFC continued to witness growth in its net income for the past couple of quarters as it has posted a positive net income of $6,040 million in Q2FY21 compared to the net loss of $3,846 million in Q2FY20 that translated into a turnaround in earnings for the company year over year. WFC’s net interest margin largely remained stable over the last few quarters as it remained in a range of 2.0% to 2.3% over Q2FY20-Q2FY21 to stood at 2.0% in Q2FY21. Further, its pre-tax ROE significantly improved to 4.3% in Q2FY21 from a negative 3.2% in Q2FY20 and 3.0% in Q1FY21.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 33.27% of the total shareholding while the top four constitute the maximum holding. Notably, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 8.12% and 4.44%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

Changes in banking statutes, regulations, and policies, including changes in how they are interpreted or implemented, could substantially impact its business. The financial services industry is highly competitive. It also faces higher competition from nonbank institutions. Further, technological advances in the financial services industry also pose a greater concern as it will enable more companies to provide financial services. Its business and earnings are substantially impacted by the fiscal and monetary policies of the federal government and its agencies.

Outlook

Sustained economic recovery along with the impact of strong markets and advancement on improving efficiency benefitted the company in Q2FY21. However, it continues to face headwinds related to low-interest rates and tepid loan demand. Further, its credit quality remained remarkably strong. Meanwhile, it expects an increase in charge-offs at some point, although it continues to witness robust trends across its businesses.

Its main focus remains on building an appropriate risk and control infrastructure and it will make sustained investments in additional resources and utilize substantial management attention towards it.  To boost the competitive position for the future, WFC is undertaking investments in its business. Besides, the company believes that it is on track to achieve double-digit ROTCE, which is the initial step to attain returns in the mid-teens.

Valuation Methodology: Price/BVPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

WFC has delivered 6-month and 9-month returns of ~+17.08% and ~+54.96%, respectively. The stock is trading higher than the average of the 52-week high price of $51.41 and the 52-week low price of $20.765.

The stock has been valued using a Price/BVPS multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/BVPS Multiple (NTM) (Peer Average), considering its strong capital position in H1FY21 with robust liquidity and regulatory capital ratios and exceptionally solid credit quality.

For relative valuation, peers like EZCORP Inc (EZPW.OQ), Fifth Third Bancorp (FITB.OQ), among others have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $46.05 per share, up by 0.64% on 14^th September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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