Company Reports

Wide-moat-rated Wells Fargo reported first-quarter EPS of $1.20 per share, ahead of the FactSet consensus estimate of $1.06 per share. Trading revenue came in quite strong at $1.4 billion, which was an all-time high for the bank. Excluding the one-time FDIC special assessment of $284 million for uninsured deposits of certain failed banks during the banking turmoil of early 2023, the core operating results came in at $1.26 per share. The first-quarter numbers resulted in a return on tangible equity of 12.3%, still below management’s medium target of 15%.

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve, and we don't see this restriction coming off in 2024. Wells Fargo has years of expense-saving projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. We also see a multiyear journey of repositioning and investing in the firm's existing franchises, including expanding its middle-market investment banking wallet share, investing in the cards franchise, and revitalizing a wealth segment that has lost advisors for years. These tasks take on increased importance for a bank that has been on defense for years after its fake accounts scandal broke in late 2016.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Wide-moat-rated Wells Fargo’s shares have rallied roughly 30% from their October-end lows as the market got excited about the prospects of interest rate cuts by the Fed in 2024. The company is slightly undervalued and is trading at a price/fair value estimate of around 0.90. At these valuation levels, we think the margin of safety has reduced materially. Nonetheless, we think investors might find an entry point should current rate cut expectations reverse or new regulatory challenges emerge. We do not plan to materially change our $55 fair value estimate for Wells Fargo as we fully incorporate fourth-quarter results.

Wide-moat-rated Wells Fargo reported fourth-quarter EPS of $0.86 per share, in line with the FactSet consensus estimate of $0.86 per share. Excluding the one-time severance charges of $969 million and FDIC special assessment of $1.9 billion for uninsured deposits of certain failed banks during the banking turmoil of early 2023, the core operating results came in at $1.29 per share. The fourth-quarter numbers, after adjusting for the FDIC charge, resulted in a return on tangible equity of 13%, still below management’s medium target of 15%.

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve, and we don't see this restriction coming off in 2023. Wells Fargo has years of expense-saving projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. We also see a multiyear journey of repositioning and investing in the firm's existing franchises, including expanding its middle-market investment banking wallet share, investing in the cards franchise, and revitalizing a wealth segment that has lost advisors for years. These tasks take on increased importance for a bank that has been on defense for years after its fake accounts scandal broke in late 2016.

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve, and we don't see this restriction coming off in 2023. Wells Fargo has years of expense-saving projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. We also see a multiyear journey of repositioning and investing in the firm's existing franchises, including expanding its middle-market investment banking wallet share, investing in the cards franchise, and revitalizing a wealth segment that has lost advisors for years. These tasks take on increased importance for a bank that has been on defense for years after its fake accounts scandal broke in late 2016.

Wide-moat-rated Wells Fargo's third-quarter results were similar to last quarter's results. The expense outlook, excluding operating losses, increased once again, this time to $51.5 billion (from $51 billion last quarter and $50.2 billion at the start of the year). While higher severance charges are undoubtedly at play, the higher technology, advertising, and salary expenses may be more structural, and we plan to slightly increase our expense forecast as a result. The full-year 2024 outlook, coming next quarter, will be a key update in determining how much lower the bank's core expense base can go. We had been hoping for something closer to $50 billion, but we think it may be tough to get rid of another $1.5 billion from here.

Wide-moat-rated Wells Fargo reported decent second-quarter results, ahead of both consensus and our own expectations. The bank had some key updates to its outlook, most of which were already hinted at during a previous conference. Specifically, the expense outlook increased to $51 billion, up from $50.2 billion, excluding operating losses. This was largely driven by higher severance charges and less attrition than the bank had previously expected, which we would view as more temporary in nature, while some of the increases also may be a bit more structural, notably in technology and advertising spending. As such, we plan to slightly increase our expense forecasts.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve and we don't see this restriction coming off in 2023. Wells Fargo has years of expense savings related projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. We also see a multiyear journey of repositioning and investing in the firm's existing franchises, including growing its middle market investment banking wallet share, investing in the cards franchise, and revitalizing a wealth segment that has lost advisors for years. These tasks take on increased importance for a bank that has been on defense for years after its fake accounts scandal broke in late 2016.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Wide-moat-rated Wells Fargo kept a steady outlook across the board, including a steady expense outlook, and most importantly a steady net interest income, or NII, outlook. The deposit base declined by 2% sequentially, which is well within our previous expectation for a 4% decline for all of 2023. Funding costs were also generally developing as expected. We felt going into the quarter that the largest banks and their deposit bases would be fine, and while profitability could face some pressure in the short term, in the longer term it would not be destroyed. We believe current results support our contention that the largest banks in particular will be fine.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve and we don't see this restriction coming off in 2023. Wells Fargo has years of expense savings related projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. We also see a multiyear journey of repositioning and investing in the firm's existing franchises, including growing its middle market investment banking wallet share, investing in the cards franchise, and revitalizing a wealth segment that has lost advisors for years. These tasks take on increased importance for a bank that has been on defense for years after its fake accounts scandal broke in late 2016. We're already starting to see glimpses of the transition to offense from defense with the launch of multiple new card products, advisors not declining for the first time in years in fourth-quarter 2022, and the $2.2 billion of incremental internal investments in 2023 (a step up from the $1.7 billion goal from 2022). Even so, while the bank is making progress, we expect a multiyear journey remains.

Wide-moat-rated Wells Fargo reported fourth-quarter EPS of $0.67, beating the FactSet consensus of $0.60 and well ahead of our estimate of $0.35 (including $3.5 billion in operating losses). While results will continue to have some noise related to the bank’s legal and regulatory issues, core expenses for the year of roughly $51.6 billion (assuming only $1.3 billion in operating losses) were in line with expectations at the start of the year. Expenses are a key focus for investors as the bank remains in turnaround mode. Based on management’s original 2021 cost-cutting plan and progress to date, we hoped for core expenses to be roughly flat to 1% down in 2023, and management’s guidance of flat core expenses met these expectations. We believe Wells’ expense initiatives remain on track for another year. Another positive note was the decline in the bank’s estimate of future possible legal losses, which declined from $3.7 billion to $1.4 billion. In the past, this number had often not declined even as the bank took legal charges and accruals. This is a positive sign that the bank is making real progress.

Wells Fargo announced that it has entered into another agreement with the Consumer Financial Protection Bureau, or CFPB. It had been rumored that another settlement was pending, so it was largely expected and was only a question of when and how much. Wells' $2 billion accrual in the third quarter for legal, regulatory, and remediation matters also seemed to foreshadow something was happening behind the scenes. We now know the details, with the CFPB ordering Wells to put $2 billion aside for further customer remediation and issuing an outright fine of $1.7 billion. It is expected that Wells' operating loss expense line will be $3.5 billion for the fourth quarter. A more normal quarterly run rate is closer to $500 million to $600 million, implying roughly $3 billion of extra losses to be booked for the fourth quarter.