Wells Fargo’s stock (NYSE: WFC) (NYSE: WFC) has lost roughly 23% YTD as compared to the 22% drop in the S&P500 index over the same period. The recent stock market decline was due to record-high inflation, higher than anticipated interest rate hikes by the Fed, and geopolitical tensions.
At its current price of $39 per share, the stock is trading 34% below its fair value of $59 – Trefis’ estimate for Wells Fargo’s valuation. The bank posted mixed results in the first quarter of 2021, with earnings topping the street expectations but revenues missing the mark. It reported total revenues of $17.6 billion – down 5% y-o-y, mainly driven by a 4% drop in corporate & investment banking and a significant decrease in the corporate division revenues. The negative growth in corporate & investment banking revenues was because of lower investment banking and trading-related income. Further, the corporate division revenues fell from $1 billion to -$12 million, as the first quarter of 2021 included a one-time benefit from the sales of Wells Fargo asset management & corporate trust services business and student loan portfolio. Notably, the consumer banking revenues were also down 1% due to lower mortgage banking income, offsetting the gains from higher card income, deposit-related fees, and net interest income. On the flip side, the commercial banking and wealth management divisions grew 12% and 6% respectively, driven by higher net interest income. Overall, the bank’s adjusted net income decreased 20% y-o-y to $3.4 billion.
The bank’s top-line improved 6% y-o-y to $78.5 billion in 2021. It was driven by a 24% rise in the noninterest income, partially offset by a 10% decline in the net interest income. The noninterest revenues primarily benefited from higher trading-related income, investment banking fees, card fees, mortgage banking income, brokerage services, investment advisory, commissions and other fees. Further, the provisions for credit losses decreased from $14.1 billion to -$4.2 billion, boosting the profitability figures. Altogether, the bank reported an adjusted net income of $20.3 billion – up 10x y-o-y.
The mortgage banking giant usually derives close to 55% of the total revenues from net interest income, which decreased to 46% in 2021 due to lower outstanding loan balances and interest rate headwinds. However, the Federal Reserve started the rate hike process in FY2022. It has already increased the benchmark interest rates thrice to a total quantum of 1.5%. Furthermore, we expect the rates to further increase over the coming months. This move will likely help the net interest income (NII). All in all, Wells Fargo’s revenues are forecast to remain around $73.7 billion in FY2022. Additionally, WFC’s adjusted net income margin is expected to decrease from 25.8% to around 20%, leading to an adjusted net income of $15 billion. This coupled with an annual EPS of $4.05 and a P/E multiple of just below 15x will lead to the valuation of $59.
|S&P 500 Return||-8%||-22%||84%|
|Trefis Multi-Strategy Portfolio||-9%||-26%||189%|
 Month-to-date and year-to-date as of 6/22/2022
 Cumulative total returns since the end of 2016