An Upside and Downside Case for Wells Fargo

April 26th, 2011 by Trefis Team
-0.37%
Downside
56.62
Market
56.41
Trefis
WFC: Wells Fargo logo
WFC
Wells Fargo

Wells Fargo (NYSE:WFC) is the fourth largest bank in the US by assets and second largest by market capitalization. The company derives nearly a third of its value from mortgage servicing and home mortgage loans which is the largest source of value for the company, according to our analysis. Wells Fargo’s mortgage business earns interest in the form of monthly payments on home loans, servicing fee on mortgage serviced for clients, interest on mortgages held for sale and gains upon their sale. Wells Fargo competes with other banks like Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and UBS (NYSE:UBS) in the mortgage business.

We have a $33.19 Trefis price estimate for Wells Fargo’s stock which is about 10% above the current market price. Below we look at the key drivers of Wells Fargo’s value that present opportunities for upside or downside to the current Trefis price estimate for Wells Fargo.

8% Downside/3% Upside  – Higher/Lower Provision for Credit Losses

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We currently forecast that the credit losses on Wells Fargo’s outstanding home mortgage loans as a percentage of the loans will fall sharply going forward and then stabilize at around 0.4%. There could be 8% downside to the Trefis price estimate if provision for credit losses were to decrease less sharply and stabilize at around 0.1% in the future. On the other hand, if the credit losses as a percentage of loans fall to historical level of around 0.2% there could be a potential upside of 2-3% to the Trefis price estimate.

4% Downside – Weak Growth in Average Outstanding Balance on Home Mortgage Loans

We currently forecast the average outstanding balance on Wells Fargo’s home mortgage loans will increase going forward from around $340 billion in 2010 to $630 billion by the end of the Trefis forecast period at an annual rate of just over 9%.  However, there could be 4% downside to the Trefis price estimate if Wells Fargo’s mortgage loan outstanding balance were to grow at a moderate rate of 5% annually in the future.

See our full analysis of Wells Fargo.