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