Analyst Note| Eric Compton, CFA |
Wide-moat rated Wells Fargo reported adjusted third quarter 2020 earnings that were technically ahead of S&P Market Intelligence consensus of $0.48, with EPS coming in at $0.73. However, there were a number of adjustable items within this number, and net interest income was once again disappointing. On a GAAP basis, EPS was $0.42, affected by $718 million in restructuring charges and $961 million in customer remediation. The return on tangible common equity in the quarter was roughly 5%. Wells continues to get hit harder than peers on its net interest income, partially due to its NIM sensitivity, with NIMs down roughly 53 basis points year over year, but also due to the asset cap and the bank’s inability to offset NIM pressure with balance sheet growth. This dynamic should continue for the foreseeable future. Notably, management had to downgrade its full year net interest income guidance once again, from a previous range of $41 billion-$42 billion, down to $40 billion for 2020. Management gave a range of flat to down a single digit percentage for NII growth in 2021, and we tend to agree more with a mid-single-digit decline. With net interest income down 19% year over year, and smaller relative trading and investment banking operations, Wells simply lacks some of the offsets the other money center banks possess. We’re hoping that fourth quarter results will show a bottom for net interest income, and that a gradual recovery in fees will continue for Wells. Regarding expenses, management said it will give more details on the next call. We’re hoping a more normalized run-rate of $54 billion-$55 billion may eventually materialize, but there is admittedly a lot of uncertainty here, and we wouldn’t be surprised to see more restructuring charges in the meantime, which will help in the longer run but push up expenses in the short run. After updating our projections with the latest results, we are decreasing our fair value estimate to $45 per share from $46.