Wells Fargo Reports a Tough Fourth Quarter
It is clear that the wide-moat firm is still a work in progress, and we are lowering our fair value estimate.
Wide-moat Wells Fargo (WFC) reported poor fourth-quarter results, largely attributable to a $1.9 billion legal charge in the quarter as well as elevated expenses in other parts of the bank. While we hadn’t made any predictions about the amounts of future operating losses, we did expect that several outsize legal charges were on their way, which is exactly what happened in both the third and fourth quarters. Given that the bank has not announced a final wave of settlements, we think it is important for investors to brace for more potential charges.
Wells also missed its overall expense guidance, which excludes excess operating losses. Adjusted noninterest expense came in at $53.7 billion compared with a goal of $53 billion. Overall, we think it is important to focus on what information was actually new versus the information that was simply negative, but predictable. Booking more legal charges was somewhat predictable, although the exact amount was a new piece of information. Missing expense guidance was also a new piece of disappointing information, although it seems that the reasons for the miss are arguably transient (outside professional services, impairments and write-downs, and severance charges). We’ll be eagerly awaiting a new outlook from management as it completes internal reviews, but in the meantime, besides bumping up our operating loss outlook for the medium term, we don’t see much that has fundamentally changed.
We think it is clear that Wells is still a work in progress, and that progress will takes years, not months. After making several adjustments to our projections, largely related to slightly higher expenses in the future, we are lowering our fair value estimate to $56 per share from $57.
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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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