Tough Q4 as Wells Fargo Reveals New 2021 Guidance
We don't plan on changing our $45 fair value estimate for the wide-moat bank.
Wide-moat Wells Fargo (WFC) reported OK fourth-quarter earnings per share of $0.64, roughly in line with FactSet consensus of $0.59. This equates to a return on tangible common equity of 8%. As expected, results weren’t pretty, and there was a lot to digest, but overall, several important items were where we wanted them. Quarterly revenue was down 10% year over year, driven by a net interest income decline of 17%, while expenses were down 5%. One disappointment for us was NII, as additional mortgage-backed securities amortization and a declining loan book pushed NII lower than we expected in the quarter, and the guidance for 2021 was a bit lower than we were hoping. Management now expects NII declines of 0%-4% in 2021 compared with an annualized 2020 fourth-quarter run rate, implying a full-year decline of roughly 8%-11% in 2021. The asset cap is still hurting, as Wells can’t expand its balance sheet to offset net interest margin pressure. The asset cap also ate into fees as trading income was down while peers were seeing growth.
Several other items of note were largely positive. The bank’s updated expense disclosures gave a lot of new details, including a 2021 expense outlook and additional color on the overall expense-saving picture. Expenses are one of the key drivers of our thesis. Based on the updated data, it appears Wells should be where we expected in 2021, and it has a good shot at hitting our previous 2022 projections as well. Further, management highlighted a direct path in the short to medium term toward a sustainable return on tangible equity of 10% and a longer-term path toward 15%; the latter is slightly above where we previously projected the bank to normalize, and it was encouraging to see that our long-term estimates of Wells’ profitability are generally supported by the latest updates. Because the longer-term items generally line up with our expectations, we don’t plan to materially change our $45 fair value estimate.
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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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