Wells Fargo & Co. (WFC) is one of the largest diversified financial services firms in the United States, with a nationwide network of several thousand branches and a large base of financial advisors, notes Stephen Biggar, an analyst at Argus Research.
Wells Fargo provides a full range of consumer banking, commercial banking, and investment banking services. The company nearly doubled its assets with the acquisition of the former Wachovia. Wells Fargo originates roughly one of every four residential mortgages in the United States.
We are maintaining our "buy" rating on Wells Fargo following 1Q earnings, which continued to be impacted by low interest rates and lending volumes. However, in line with industry trends, the company was able to recapture credit reserves after a substantial reserve build in the first half of 2020.
After the Federal Reserve’s stress test review in June 2020, the company reduced its quarterly dividend to $0.10 per share from $0.51 — in order to comply with the Fed’s requirement that dividends not exceed average net income over the preceding four quarters. We look for the dividend to be increased following the 2021 stress test.
We expect near-term revenues to be hurt by lower lending volumes and narrower margins following the Fed’s emergency rate cuts; however, we believe that high loss provisions have abated, with the recapture of further reserves possible if credit defaults remain low.
On April 14, WFC reported 1Q21 earnings of $1.05 per share, up from $0.01 a year earlier and above the consensus of $0.70. Revenue rose 2% to $18.1 billion, as higher investment and mortgage income outweighed the impact of lower interest rates on net interest income.
WFC shares are down 27% over the past year, versus a 49% advance for the broad market. WFC shares are trading at an elevated P/E ratio due to depressed earnings, driven by revenue and credit cost headwinds from the coronavirus. Still, we expect an earnings rebound in 2021-2022, and see a strong potential catalyst for the shares in the removal of the asset cap.
The stock trades at 1.2-times tangible book value, below historical levels as the company works through depressed earnings caused by low interest rates, and at 13.3-times our 2021 EPS estimate.
WFC traded at depressed multiples prior to the pandemic, hurt, we believe, by the sales practice scandal and the subsequent cap on assets. We expect valuation to improve as the company overcomes these challenges. We are raising our target price to $47 from $37, implying a multiple of about 15-times our 2021 estimate.
