Wells Fargo’s Stock Looks Fairly Priced In Light Of Expected Revenue Pressure

November 4th, 2019 by Trefis Team
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Wells Fargo

Wells Fargo (NYSE:WFC) is the fourth largest bank in the U.S and offers commercial banking, consumer banking, insurance, wealth management, investment banking and mortgage services to clients around the world. Trefis has a price estimate of $51 for Wells Fargo’s stock which is around the current market price. Our price estimate takes into account Wells Fargo’s earnings release for the third quarter (with the bank falling short of consensus earnings estimates), and the recent interest rate cut by the Federal Reserve. For the third quarter, Wells Fargo reported $22 billion in total revenues thanks to a 22% jump in wealth & investment management that mitigated the impact of a 5% decline in wholesale banking as well as community banking segments on the top line. Notably, the bank recently appointed Charles Scharf as new CEO and president, who faces the challenging task of convincing the Fed that Wells Fargo’s internal controls are now strong enough.

We have detailed the key components of Wells Fargo’s Valuation in an interactive dashboard, along with our forecast for the full year 2019. Additionally, you can see more Trefis data for financial companies here.

The stock price estimate can be divided into 4 factors: Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

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Wells Fargo’s Total Revenues Expected To Nudge Lower For Full-Year 2019

  • We expect Wells Fargo’s revenue to be around $85 billion in 2019, 2% less than the previous year.
  • This would be driven by a 2% drop in community banking and marginal decline in wholesale banking revenues.
  • The reduction in wholesale banking revenues is likely to be because of a 3% drop in commercial lending revenues, partially offset by 6% growth in Trading & Investment Banking segment.
  • Notably, Insurance & Other revenues are expected to remain at the same level as the previous year.
  • Further, Wealth & Investment Management revenues are expected to remain unchanged due to asset management industry headwinds.

Our interactive dashboard for Wells Fargo details what is driving changes in revenues of Wells Fargo’s individual revenue streams along with our forecast for the next three years?

This Will Lower The Net Income Despite Improvement On The Cost Front

  • Although expenses would decrease by 1% y-o-y to $57.2 billion, lower revenues will more than offset its impact on net income.
  • We expect net income to shrink 2% compared to the figure in 2018 to $20.2 billion – implying a reduction in net income margin from 23.9% in 2018 to 23.7% in 2019.

And Lends Support To A $51 Price Estimate For Wells Fargo’s Shares

  • Wells Fargo has regularly invested in share repurchases to boost shareholder returns. Its share repurchase is likely to touch $22.9 billion for the full year 2019.
  • This would enable the bank to report an EPS figure of $4.66 in 2019.
  • This EPS figure coupled with our forward P/E multiple of 11x works out to a price estimate of $51 for Wells Fargo’s stock.

Details about how Wells Fargo’s P/E multiple compares with peers Citigroup, JPMorgan and Bank of America is available in our interactive dashboard.

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