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Stock Analyst Update

Wells Fargo Releases Reserves in Q1

We're maintaining our fair value estimate of $52 per share.

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Wide-moat Wells Fargo (WFC) reported excellent first-quarter earnings, easily exceeding FactSet consensus of $0.72 with reported EPS of $1.05. This equates to a return on tangible common equity of 12.7%. The biggest swing factor was provisioning for credit losses.

As we had expected, the bank released a sizable portion of reserves, totaling roughly $1.6 billion. We had been more bullish than consensus on reserve releases, and we expect Wells could have even more reserve releases ahead. If we assume provisioning would have been closer to the 2019 run rate of roughly $670 million, EPS would have been closer to $0.66 and ROTCE would have been closer to 8%. In other words, the bank still has a long way to go.

That said, management stuck to its previous net interest income and expense guidance ranges. If anything, management seemed to suggest net interest income would end up in the middle to upper end of its previous guidance. We think this was an important symbolic victory. In the past, for example, net interest income guidance was often missed and then adjusted downward. With management able to stand its ground, and even imply optimism, we think an important, subtle shift has taken place.

Overall, current results largely fit within our existing projections, and we are maintaining our fair value estimate of $52 per share. Wells remains our top pick among the traditional U.S. banks, and we think it has unique, idiosyncratic upside compared with peers.

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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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