VALUATION HIGHLIGHTS

1. Corp & Investment Banking constitutes 37% of the Trefis price estimate for Wells Fargo & Co.'s stock.
2. Commercial Banking constitutes 25% of the Trefis price estimate for Wells Fargo & Co.'s stock.
3. Community Banking constitutes 18% of the Trefis price estimate for Wells Fargo & Co.'s stock.

WHAT HAS CHANGED?

Latest Earning

In Q4 2023, Wells Fargo posted revenues of $20.5 billion, which is 2% more than the year-ago period. This could be attributed to a 17% increase in the noninterest income.

Wells Fargo is the biggest mortgage banker in the United States, with a sizable loan portfolio of around $336 billion in community loans and $224 billion in commercial loans (as per 2023 data). The bank suffered losses in 2020 due to the combined effect of lower consumer demand, supply chain disruption, and global economic slowdown exposing the bank to the possibility of sizable loan defaults. As a result, the company reported weak results for the year 2020, with revenues decreasing by 15% y-o-y to $72.3 billion. However, it has since seen some recovery, with a gradual increase in revenues. Notably, Wells Fargo's FY2023 revenues were around $82.6 billion

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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:

Community Banking

• Net Interest Income as % of Total Loans: We currently estimate that the net interest yield on Wells Fargo's community banking loans will decrease to 7.57% by the end of Trefis forecast period. However, there could be a 1% upside to the Trefis price estimate if the yield figure reaches the 7.9%-level.
• Provisions as % of Mortgage Loans: We currently forecast credit losses on Wells Fargo's outstanding home mortgage loans as a percentage of the total loans will normalize around 0.06%. However, if the credit losses as a percentage of loans settle around 0.25%, there could be a potential downside of 2% to the Trefis price estimate.

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.

BUSINESS SUMMARY

Wells Fargo & Co. is a diversified financial services company headquartered in San Francisco, U.S. It is the third-largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo originates and services the largest number of mortgages in the country. It is also the second-largest bank in terms of deposits and debit cards in circulation.The bank offers financial products and services for corporates, governments, financial institutions, and private and business clients throughout the world. Services offered include banking, insurance, investments, mortgage, and consumer finance.

SOURCES OF VALUE

Mortgage Operations

Wells Fargo's 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.In 2023, Wells Fargo serviced (processed monthly payments of home loans) $1.1 trillion in third-party mortgages (besides the mortgages it originated and retained) - making it one of the largest servicers of mortgages in the U.S.

KEY TRENDS

Higher prime loan interest rates will benefit Wells Fargo

The rate decreased to near zero in 2020, due to the Covid-19 crisis. However, the Federal Reserve increased the rates in 2022 and 2023. It has boosted the bank's net interest income, which is likely to remain elevated till the Fed's rate correction cycle is completed.

High core deposits and low cost of funding:

Wells Fargo has a net interest margin (interest earned on earning assets minus interest paid on funding sources as a percentage of interest-earning assets) of 3.06% in 2023.High net interest margins at Wells Fargo are largely attributed to its large average core deposits (which include non-interest-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%.

Consolidation expected to continue

As a result of the financial crisis of 2008, the banking industry saw a period of mergers and consolidation. The financial crisis has seen nearly 15-20% of the market share change hands. The banking industry continues to see consolidation in almost every business aspect as players try to globalize and seek scale. Customers are also increasingly becoming more risk-averse and turning to larger players with stronger deposit bases due to uncertainty.