Wells Fargo’s Weak Outlook For 2019 Does Not Undermine Its Long-Term Value Potential

Per Trefis estimates, Wells Fargo’s (NYSE: WFC) stock is worth $57, which is 15% higher than the current market price. Our price estimate is based on an EPS estimate of $4.61 for FY 2019 and a P/E multiple of 12.4. We have summarized our full-year expectations for Wells Fargo in our interactive dashboard How Did Wells Fargo Fare In Q1 2019, And What Can We Expect In 2019? You can modify any of our key drivers to gauge the impact of changes on its valuation. In addition, you will find more Trefis data for Financial Services companies here.

A Quick Look At Wells Fargo’s Sources of Revenue

Wells Fargo’s Revenues are divided into 4 segments ($86.4 billion in 2018)

• Community Banking – $41.3 billion in 2018 (48% of Total Revenues) This segment provides banking services for consumers and small business, which include checking and savings accounts, credit and debit cards, as well as automobile, student, mortgage, home equity and small business loans.
• Wholesale Banking – $26.5 billion in 2018 (31% of Total Revenues) This segment includes services like Commercial Lending (e.g. commercial loans, letter of credit, asset-based lending, lease financing) and Securities Trading & Investment Banking
• Wealth and Investment Management – $16.4 billion (19% of Total Revenues) This division represents non-interest income earned by providing asset management, investment, retirement and brokerage services to customers.
• Insurance & Other – $2.2 billion (2% of Total Revenues) It consists of non-interest income earned by providing insurance & other services like operating leases to customers.

Outlook For Wells Fargo’s Key Revenue and Expense Drivers

Net Interest Income – Wells Fargo’s net interest income forms a majority of the bank’s Community Banking as well as Wholesale Banking revenues. This core revenue stream has been under pressure over several quarters now due to the Fed’s enforcement order forcing the bank to cap its balance sheet. There was a decline of sequential decline of 3% in Wells Fargo’s Net Interest Income in Q1 despite the Fed’s rate hike in December. As we expect the Fed’s enforcement order to remain in place over 2019, the Net Interest Income figure for the year should remain level to that in 2018.

Mortgage Banking Fees – Wells Fargo’s mortgage banking division (which is a part of Community Banking) continues to bear the brunt of the slowdown in the mortgage industry, and has reported a steady decline in revenues for several quarters now. The cornerstone mortgage business saw revenues fall 24% year-on-year in Q1, and we don’t think things are likely to improve much in Q2. However, the U.S. mortgage industry is expected to turn the corner over the latter half of the year, and should help boost Wells Fargo’s mortgage banking fees.

Non-Interest Expenses – With the Fed’s enforcement order severely limiting Wells Fargo’s growth opportunities, the banking giant has focused on cutting costs to offset revenue headwinds and to boost its bottom line. Non-interest expenses were only 64.4% of revenues in Q1 2019, as opposed to 68.5% a year ago. We expect the bank to continue to keep costs in check over subsequent years, which should have a positive impact on earnings for the year.

Also, Wells Fargo should continue to repurchases billions of dollars worth of shares over the year, which coupled with the factors detailed above should help its EPS figure improve to $4.61 for FY 2019 from $4.28 in 2018. Coupled with our forward P/E multiple of 12.4, this works out to a price estimate of $57 – representing a potential upside of 15% for the bank’s stock.

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