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Stock Analyst Update

Wells Fargo Moving in the Right Direction

As legal issues fade, operating losses are down, and we are maintaining our fair value estimate for the wide-moat firm.


Wide-moat  Wells Fargo (WFC) continues to wade through its legal issues, recording another $241 million in remediation accruals. However, operating losses were at $605 million, down from $619 million last quarter, and far lower than the over $1 billion in losses per quarter for multiple quarters preceding this. This is at least in the right direction, and the bank announced no new legal issues, as the charges were related to already announced items. The return on average tangible common equity improved to 14.3%, and diluted EPS was up over 30% year over year. If Wells can begin to get past its legal and operating woes, maintain expense discipline, and return to anywhere close to its former profitability, the bank is arguably undervalued at today’s prices. We are maintaining our fair value estimate of $67 per share.

Primary consumer checking customers were up 1.7% year over year, retention rates for these customers reached a five year high, and debit and credit card purchase volumes were also both up year over year. We view these as positive signs that Wells’ underlying consumer business has not been permanently weakened or impaired. Average loan balances were down, which was largely expected, and this was across a broad number of different loan portfolios. However, average credit card balances still managed to grow quarter over quarter for the bank. Credit quality remained pristine, as the net charge-off ratio remained range-bound and provisions picked up only slightly. Management reiterated their expense guidance, and we see the bank being able to consistently decrease the expense base through 2020. This is partially helped by the assumption that legal accruals will not be as sizable and will eventually go away, but it is also based on taking real costs out of the business as well.

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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.