Skip to Content
Stock Analyst Update

Wells Fargo Is Working to Get Back on Its Feet

Regulators are still eyeing the firm for now, but longer-term capital return prospects look bright.

Mentioned:

Wide-moat  Wells Fargo’s (WFC) efficiency ratio disappointed in the first quarter, coming in at 64.9%, as the company continued to suffer the effects of its sales excesses—including a consent order limiting growth and another pending financial penalty from the Consumer Financial Protection Bureau. That said, the company still managed to generate a 12.4% return on equity during the quarter and a 14.8% return on tangible common equity. If the company is able to meet its cost-cutting goals by 2020, both efficiency and returns on capital should improve significantly, easily justifying our $65 fair value estimate (just under 2.1 times tangible book value). Wells Fargo’s dividend yield of around 3% adds to the stock’s attractiveness.

Reported consumer banking metrics indicated slight improvements in loyalty and satisfaction over the past year, and credit card balances and purchase volume rose at healthy mid-single-digit rates during the past year. Wells Fargo’s card business is relatively weak compared with peers, and the de-emphasis of cross-selling over the last 12 months should have hindered growth of the card business, yet the company managed to grow. Interestingly, referrals from the community bank to the wealth and investment management segment also rose by 6% during the year. Unfortunately, community bank deposits fell slightly at the same time, as more sophisticated customers sought higher returns as interest rates rose. That said, we expect Wells Fargo’s sticky deposit base to become more valuable relative to competitors’ as rates rise.

Wells Fargo may be in the penalty box with respect to its regulators in the near term, but longer-term capital return prospects look bright. The company’s net payout ratio was just 72.9% during the quarter, and its common equity Tier 1 ratio was 12%, well in excess of minimums with possible capital relief on the way. Long-term shareholders could be rewarded with dividend growth if the company is able to regain its footing. 

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Jim Sinegal does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.