Wells Fargo Stock Is Trading Below Its Fair Value

WFC: Wells Fargo logo
Wells Fargo

Wells Fargo’s stock  (NYSE: WFC) has lost approximately 12% YTD as compared to the 3% rise in the S&P500 index over the same period. Further, at its current price of $36 per share, the stock is trading 32% below its fair value of $53 – Trefis’ estimate for Wells Fargo’s valuationThe bank posted mixed results in the fourth quarter of 2022, with earnings beating the consensus but revenues missing the mark. It reported total revenues of $19.66 billion – down 6% y-o-y, primarily driven by a 46% decrease in the noninterest revenues, partially offset by a 45% rise in the net interest income (NII). The non-interest revenues mainly suffered due to a significant drop in net gains (losses) from trading-related activities, and lower mortgage banking and investment banking revenues. On the cost front, the non-interest expenses as a % of revenues increased from 63.2% to 82.4% in the quarter. Further, provisions for credit losses witnessed an unfavorable build-up from -$452 million to $957 million. Overall, the adjusted net income was reduced by 53% y-o-y to $2.6 billion. 

The bank’s top line decreased 6% y-o-y to $73.79 billion in FY 2022. While the NII rose by 26% y-o-y to $44.95 billion driven by higher interest rates and loan growth, it was more than offset by a 32% decline in the non-interest income. Further, the provisions for credit losses increased from -$4.15 billion to $1.5 billion, negatively impacting the bottom line. In addition, the noninterest expenses also increased by 6% y-o-y. Altogether, the adjusted net income decreased by 40% y-o-y to $12.1 billion.

Moving forward, we expect the NII to continue its growth momentum in Q1 2023. Notably, the consensus estimates for Q1 revenues and earnings are $20.18 billion and $1.15 respectively. All in all, Wells Fargo’s revenues are forecast to remain around $80 billion in FY2023. Additionally, WFC’s adjusted net income margin is expected to improve in the year, from 16.4% to around 21%, leading to an adjusted net income of $16.9 billion. This coupled with an annual EPS of $4.75 and a P/E multiple of just above 11x will lead to a valuation of $53.

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 Returns Mar 2023
MTD [1]
YTD [1]
Total [2]
 WFC Return -23% -12% -34%
 S&P 500 Return 0% 3% 77%
 Trefis Multi-Strategy Portfolio -3% 4% 226%
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[1] Month-to-date and year-to-date as of 3/27/2023
[2] Cumulative total returns since the end of 2016

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