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Stock Analyst Update

Middling Quarter for Wells Fargo

We're maintaining our fair value estimate and view the current valuation as undemanding.


Wide-moat Wells Fargo (WFC) reported middling third-quarter earnings. While the bank exceeded the FactSet consensus estimate of $1.00 per share with reported EPS of $1.17, we think the outlook for expenses and net interest income was a bit soft. Even after excluding the $250 million charge related to recent issues with the OCC, the bank's expenses came in a bit above our expectations. Management attributes a good chunk of this to higher revenue, and indeed, fees and salary expenses were two key items that came in above our expectations. As such, we've adjusted our expense forecast slightly to account for slightly higher salary growth in the years to come as well as any extra work that might be needed as the OCC exhibits more regulatory pressure on the bank. Management was reticent to give any guidance for 2022 and instead deferred to next quarter's call. Net interest income was also a bit weak, and we expect it to come in at the very bottom of management's previous guidance of down 0%-4%. The one bright spot was fee growth, with investment banking, wealth, mortgage, and service fees all exceeding our expectations, a pattern we have seen with peers, as well. CEO Charles Scharf once again spoke of the regulatory items as a multiyear effort, and we get the sense that the asset cap might stay on past 2022. All things considered, our long-term profitability outlook for Wells has not changed materially, but we do admit that the near term will be tough as the bank likely remains under the asset cap while peers are fully able to participate in any loan growth that materializes in 2022. We still think expenses will be down in 2022 compared with 2021, and the bank seemingly has more excess reserves than its peers, which can be released over time. After incorporating these results, we're maintaining our $55 per share fair value estimate and view the current valuation as undemanding (as it is difficult to say what the near term catalyst will be for Wells to regain some momentum).

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Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.