Wells Fargo’s stock (NYSE: WFC) has gained approximately 7% YTD as compared to the 5% drop in the S&P500 index over the same period. Further, at its current price of $51 per share, it is trading 16% below its fair value of $61 – Trefis’ estimate for Wells Fargo’s valuation. The mortgage banking giant posted better than expected results in the fourth quarter, with total revenues increasing 13% y-o-y to $20.9 billion. This could be attributed to an 11% growth in the corporate and investment banking unit, followed by a 6% rise in wealth & investment management, and a 113% jump in the corporate segments. The corporate & investment banking revenues increased because of the positive growth in the investment banking business. Further, the wealth & investment management division benefited from higher asset-based fees on higher market valuations, partially offset by lower net interest income (NII). Notably, the growth in the corporate segment was due to the net gains of $674 million and $269 million from the sales of the Corporate Trust Services (CTS) business and Wells Fargo Asset Management (WFAM) unit. Overall, the revenue growth coupled with lower total expenses as a % of revenues resulted in a 86% y-o-y gain in the net income to $5.8 billion.
The bank’s total revenues increased 6% y-o-y to $78.5 billion in 2021. This was because of a 3% rise in the consumer banking business, followed by a 9% increase in the wealth and investment management unit. The consumer banking revenues increased due to higher card and mortgage banking fees, partially offset by lower net interest income. On a similar note, growth in the wealth management division was driven by a rise in total client assets – up 9% y-o-y to $2.2 trillion. Further, the top-line benefited from the one-time gain from sales of CTS, WFAM, and the student loan portfolio in the year. All in all, the above revenue growth, coupled with a decrease in the provisions for credit losses and lower noninterest expenses as a % of revenues, translated into adjusted net income of $20.3 billion – up 10x y-o-y. Notably, the provisions figure reduced from $14.1 billion to -$4.2 billion.
The Federal Reserve has increased the interest rate by a quarter percent recently and is anticipated to further raise it several times in FY2022. This move will likely help the net interest income (NII) of lenders like Wells Fargo. Further, growth in total client assets and improvement in consumer spending levels will likely boost the noninterest income of the bank. Altogether, Wells Fargo revenues are expected to remain around $75.2 billion in FY2022. Additionally, WFC’s adjusted net income margin is expected to decrease in the year, from 25.8% to around 19%, leading to an adjusted net income of $14.4 billion. This coupled with an annual EPS of $3.76 and a P/E multiple of just above 16x will lead to the valuation of $61.
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