Will Wells Fargo’s Revenues Turn The Corner In 2019?

by Trefis Team
Wells Fargo & Co.
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Wells Fargo (NYSE:WFC) is the third-largest bank in the U.S. by assets. It provides commercial banking, consumer banking, insurance, wealth management, investment banking and mortgage services to clients around the world, although its primary market is the U.S. Its business model faces stiff competition from offerings by its peers including Citigroup, JPMorgan, Bank of America, U.S. Bancorp and Capital One among others.

Trefis has analyzed trends in Wells Fargo’s Revenues over recent years in an interactive dashboard along with our forecast for the next three years. Total revenues marginally increased to $88.4 billion in 2017, before reducing to $86.4 billion in 2018 as a direct result of the Fed’s growth restriction on the bank. With the restrictions expected to remain in place till the end of this year, we expect the top line to shrink further by 3.2% y-o-y in 2019, before increasing by around 1.5% over the next two years. Overall, Wells Fargo’s revenues are unlikely to recover to the 2018 level of $86.4 billion by 2021.

You can make changes to our forecast for individual revenue streams in the dashboard to arrive at your own forecast for Wells Fargo’s revenues. Additionally, you can see more Trefis data for financial companies here.

[A] Community Banking Revenues are expected to drop by 1.6% in 2019

  • Community Banking offers loans (automobile, student, mortgage, home equity & small business loans), checking & savings accounts and credit & debit cards to retail consumers and small businesses.
  • The segment revenues have seen negative growth over the last three years – from $43.8 billion in 2016 to $41.3 billion in 2018.
  • Although it would reduce further by 1.6% y-o-y in 2019 driven by the pressure in interest rates and lower consumer activity, we expect it to recover in the subsequent years and grow at an average annual rate of 1.9%. This would enable it to cross $42.2 billion by 2021.

[B] Wholesale Banking derives more than 70% of its revenues from commercial lending.

  • This division can be subdivided into 3 businesses-
    • Commercial Banking: It includes traditional commercial loans and lines of credit, letters of credit, asset-based lending, lease financing and Wells Fargo’s foreign loan portfolio.           
    • Trading & Investment Banking: It includes Wells Fargo’s trading operations (Fixed income, currency & commodity trading and Equity trading) and investment banking services.
    • Insurance & Other: It represents noninterest income earned by providing insurance & other services like operating leases to the customers.
  • Although commercial lending revenues have grown at an average annual rate of 6% y-o-y over the last three years, wholesale banking revenues decreased by 1.3% in 2017 due to a sharp 36% drop in Insurance & Other segment.
  • We expect commercial lending revenues to drop by 2% in 2019 due to negative market conditions. However, it is expected to grow at an average annual rate of 1% over the next two years and enable wholesale banking to cross $28.9 billion by 2021.
  • Notably, trading & investment banking revenues are expected to remain around the 2018 figure over the next three years.

[C] Wealth & Investment Management Revenues would decrease from $16.4 billion in 2018 to $15 billion in 2021.

  • This division offers asset management, investment, retirement and brokerage products and services to clients in U.S.
  • In 2018, drop in asset valuations and lower consumer activity levels were the main reason behind a 3.2% decline in Wealth & Investment Management revenues.
  • Given secular changes in the asset management industry (with investors preferring passive products and ETFs to actively-managed funds), and in view of the fierce competition in the wealth management space, we expect revenues to continue to shrink over coming years despite a steady increase in client assets.

Trefis estimates the fair value of Wells Fargo’s stock (shows cash and valuation analysis) to be $53 per share, which is roughly 10% higher than the current market price.

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