Wells Fargo’s stock (NYSE: WFC) has made negligible gains YTD as compared to the 17% rise in the S&P500 index over the same period. Further, at its current price of $41 per share, the stock is trading 17% below its fair value of $50 – Trefis’ estimate for Wells Fargo’s valuation.
Interestingly, Wells Fargo stock had a Sharpe Ratio of almost Zero since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.29 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
The bank outperformed the consensus estimates in the second quarter of 2023, with total revenues increasing by 20% y-o-y to $20.53 billion. It was mainly driven by a 29% growth in the net interest income (NII), followed by an 8% rise in the non-interest revenues. The NII benefited from higher interest rates and loan growth in both consumer and commercial portfolios. Similarly, the noninterest income was up due to a 152% improvement in the net gains from trading activities and lower losses from equity securities. On the cost front, the provisions for credit losses witnessed an unfavorable build-up from $580 million to $1.7 billion. However, the impact was offset by a drop in noninterest expenses as a % of revenues from around 75% to 63%. Overall, the adjusted net income grew 63% y-o-y to $4.66 billion.
The bank’s top line grew 19% y-o-y to $41.26 billion in the first half of FY 2023. It was because of a 36% jump in the NII, partially offset by a 4% decrease in the noninterest revenues. Further, the noninterest expense as a % of revenues decreased over the same period, offsetting the negative impact of higher provisions figure. Altogether, this translated into a 47% increase in the adjusted net income to $9.37 billion.
Moving forward, we expect the same trend to continue in Q3 2023. All in all, Wells Fargo’s revenues are estimated to remain around $81.4 billion in FY2023. Additionally, WFC’s adjusted net income margin is expected to improve in the year, leading to an adjusted net income of $17.6 billion. This coupled with an annual EPS of $4.91 and a P/E multiple of just above 10x will lead to a valuation of $50.
|S&P 500 Return||0%||17%||100%|
|Trefis Reinforced Value Portfolio||-2%||29%||563%|
 Month-to-date and year-to-date as of 9/12/2023
 Cumulative total returns since the end of 2016