Wells Fargo Stock Is Trading Below Its Fair Value

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 valuation. The 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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[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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