Wells Fargo & Co. Company
VALUATION HIGHLIGHTS
- Corp & Investment Banking constitutes 36% of the Trefis price estimate for Wells Fargo & Co.'s stock.
- Commercial Banking constitutes 26% of the Trefis price estimate for Wells Fargo & Co.'s stock.
- Wealth & Investment Mgmt constitutes 18% of the Trefis price estimate for Wells Fargo & Co.'s stock.
WHAT HAS CHANGED?Latest Earning
In Q2 2023, Wells Fargo posted revenues of $20.5 billion, which is 20% more than the year-ago period. This could be attributed to a 29% increase in the net interest income and a 8% rise in the noninterest income.Impact of coronavirus outbreak
Wells Fargo is the biggest mortgage banker in the United States, with a sizable loan portfolio of around $332 billion in community loans and $206 billion in commercial loans (as per 2022 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. Hence, the bank increased its provisions for loan losses in the year to compensate for the higher loan default risk - from $2.7 billion to $14.1 billion.
The company reported weak results for the year 2020, with revenues decreasing by 15% y-o-y to $72.3 billion. It was mainly driven by a 16% y-o-y drop in the net interest income due to a lower interest rate environment and a drop in new loan issuance.
Wells Fargo’s FY2021 and FY 2022 revenues were around $78.5 billion and $73.79 billion respectively. Notably, the figure suffered in 2022 due to lower non interest income.
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 remain around the current level (7.32% in 2022). However, there could be a 1% upside to the Trefis price estimate if the yield figure reaches the 7.5%-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 0.03%. 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 2022, Wells Fargo serviced (processed monthly payments of home loans) $1.25 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
Wells Fargo's reputation has taken a hit from a series of mis-selling scandals:
Wells Fargo revealed in September 2016 that its employees fraudulently opened millions of accounts. Since then, internal investigations by the bank have unearthed other improper practices by some employees including making unsuitable mortgage modifications, selling unwanted auto insurance, improperly charging fees for locking-in mortgage rates, and adding chargeable add-ons to accounts without the customers' permission.The series of mis-selling practices targeting retail customers have had a notable negative impact on Wells Fargo's reputation, besides already costing the bank millions in settlement and remediation fees.
Recent increase in prime loan interest rates can benefit Wells Fargo
The rate decreased to near zero in 2020, due to the Covid-19 crisis. However, the Federal Reserve initiated the rate hike process in 2022 and so far has increased it eight times by a total quantum of 4.5-4.75%. Further, we expect the rates to see some more hikes in the year. It will likely have a positive impact on Wells Fargo's net interest income.
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 2.63% in 2022.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 aspect of the business as players try and globalize and seek scale. Customers are also increasingly becoming more risk-averse and turning to larger players with stronger deposit bases due to uncertainty. The number of FDIC-Insured Commercial Banks and Savings Institutions in the U.S. declined from 9,116 in Q1 2004 to less than 4,800 in 2022.