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Investment Overview for Wells Fargo & Co. (NYSE:WFC)
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Below are key drivers of Wells Fargo's value that present opportunities for upside or downside to the current Trefis price estimate for Wells Fargo:
Mortgages
- 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 under $320 billion in 2012 to cross $420 billion by the end of the Trefis forecast period,an average annual growth rate of about 4%. However, there could be 5% downside to the Trefis price estimate if Wells Fargo's mortgage loan outstanding balance were to grow at the rate of 2% annually in the future.
- Provisions for Credit Losses as % of Home Mortgage Loans Outstanding: We currently forecast that the credit losses on Wells Fargo's outstanding home mortgage loans as a percentage of the total loans will fall sharply going forward to settle around 1.1%. There could be 4% downside to the Trefis price estimate if provision for credit losses were to remain around current levels in the future. On the other hand, if the credit losses as a percentage of loans fall to historical level of around 0.5% there could be a potential upside of 5% to the Trefis price estimate.
Asset Management & Brokerage
- Commission & Other Fees: We currently forecast that Wells Fargo's commission & other fee revenues from the asset management and brokerage business will rise rapidly from $7.7 billion in 2012 to almost $11 billion by the end of the Trefis forecast period, an annualized rate of 5.5%. There could be a 3% downside to the Trefis price estimate if commission and other fee revenues increase at a slower rate reaching $9 billion by the end of the forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Wells Fargo at the top of the page.
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Wells Fargo & Co. is a diversified financial services company headquartered in San Francisco, U.S. At the end of 2012, Wells Fargo was the fourth largest bank in the U.S. by assets and the largest bank by market cap. Wells Fargo originates and services the largest number of mortgages in the country. It is also the second largest bank in deposits and debit card.
The bank offers financial products and services for corporates, government, financial institutions, private and business clients throughout the world. Services offered include banking, insurance, investments, mortgage and consumer finance.
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Mortgage Division
The mortgage division, consisting of home mortgage loans (does not include commercial real estate mortgage loans), mortgage servicing business and mortgages held for sale, is the cornerstone of Well Fargo's business model.
With $524 billion in mortgage origination in 2012 Wells Fargo was the nation's largest mortgage originator, funding one of every three mortgages in the U.S. Also, Wells Fargo serviced (processed monthly payments of home loans) $1.9 trillion in mortgages - one of every six mortgage holder nationwide - and is currently the largest servicer of mortgages in the U.S.
Asset Management & Brokerage, Deposits and Insurance & Other
Non-interest income generating divisions like Asset Management & Brokerage, Deposits and Insurance & Other are some big sources of value for Wells Fargo. The income from these divisions includes maintenance fee on deposit accounts & Individual Retirement Accounts (IRA), brokerage on trading, insurance fee, trust and investment management fee.
With more than 20 million retail bank households and over 2.5 million small business and business banking households, Well Fargo had ~$900 billion in core deposits in 2012.
Wells Fargo is also among the top-five IRA providers and administers 401(k) plan for nearly 3.5 million employees. The segment has great potential as currently only six of every 100 Wells Fargo customers have an IRA account with the bank.
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Increase in cross-selling at Wells Fargo:
Cross-sell, meaning the number of products sold per relationship, has been been on the rise for Wells Fargo. A direct relationship exists between cross-selling and revenues for banks. As such, while the cross-sell for Wells Fargo's wholesale and retail banking increased at annualized rate of ~6%, Wells Fargo's revenues increased at an annualized rate of ~9% (excluding increase in revenue due to Wachovia acquisition).
With plans to increase cross-sell to around 8 products per relationship from the current levels of around 5.7, Wells Fargo will observe increasing revenues in the future. The retail bank household cross-sell for the average U.S. financial services consumer stands at 14-16 currently.
High core deposits and low cost of funding:
Wells Fargo has the highest net interest margin (interest earned on earning assets minus interest paid on funding sources as a percentage of interest earning assets) of 4.86% (10 year average 2001-2010) which is significantly higher than the peer group average of 3.39% in the banking industry. The peer group includes banks like Citigroup, JPMorgan Chase and Bank of America.
High net interest margins at Wells Fargo are, in large part, attributed to its large average core deposits (which include noninterest-bearing deposits, interest-bearing checking, savings certificates, market rate and other savings, and certain foreign deposits). Nearly two-thirds of Wells Fargo's funding comes from deposits, much higher than the peer average of under 50%.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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