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Stock Analyst Update

Wells Fargo's Quarterly Losses Manageable at This Stage

We're lowering our fair-value estimate for the wide-moat firm.


Wide-moat Wells Fargo (WFC) reported difficult first-quarter results, with net income coming in at $653 million, or $0.01 per diluted share. This was expected on some level, given the impact of the COVID-19 pandemic on the global economy, however, it would have been impossible to predict the exact amount of reserves the bank was going to book in preparation for the upcoming downturn. This was one of the main “unknowns” going into earnings, and the bank ended up booking $4 billion in reserves during the quarter. For context, Wells Fargo recorded less than $3 billion in reserves for all of 2019. Return on tangible common equity was reported at 0.1%.

In addition to higher reserves, Wells Fargo also saw almost $1 billion in securities impairments, and losses and revaluations within the mortgage portfolio caused mortgage-related income to come in below our original expectations. Guidance from management was nonexistent, which is understandable on some level given the high degree of uncertainty being caused by COVID-19. After updating our models for the latest results, we are predicting another large reserve build in the second quarter, after which losses begin to level out. We have also incorporated the latest rate cuts and expectations for lower fee income, leading us to a new fair value estimate for Wells of $50, down from our previous estimate of $55.

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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.

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