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Stock Analyst Update

Pain Continues for Wells Fargo in Q2

The pain continued for Wells Fargo in the second quarter, as the bank reported a net loss of $2.4 billion, or $0.66 per share.


The pain continued for Wells Fargo (WFC) in the second quarter with a net loss of $2.4 billion, or $0.66 per share. The bank barely eked out a profit in the first quarter and was unable to do so in the second. On the surface, the main driver was again provisioning, with the bank recording provisioning expense more than double that of the first quarter. This was arguably above what anyone expected. Peers generally saw an increase in provisioning expense of roughly 12%-25% compared with the first quarter, far below what Wells recorded. The bank also cut its dividend, as expected. We previously thought the bank would cut the dividend but wouldn’t be forced to cut to $0, and Wells did announce a cut to its quarterly dividend from $0.51 to $0.10. However, while management implied that it doesn't think it will have to cut the dividend further, we warn investors that this is not a given; we now think there is a material chance the dividend could be cut to $0. It will largely depend on how much Wells has to record in provisioning expense in the third and fourth quarters. 

Smaller capital markets and trading operations and an inability to grow the balance sheet due are hurting results for Wells. While expected limited balance sheet growth, Wells’ net interest margins are deteriorating more than we originally anticipated. If there were any positives, it is that the bank’s common equity Tier 1 ratio is holding up well, increasing to 10.9% in the second quarter, and the bank hasn’t destroyed massive amounts of tangible book value per share, down only 5% year over year. After updating our projections for the latest results, we lower our fair value estimate to $46 from $50. This is partially due to updated rate assumptions, which took $1 off our valuation, but the largest factor was our incorporation of a 50% chance that Joe Biden is elected president and his proposed tax plan is implemented, which would raise the corporate tax rate to 28% from 21%.

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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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