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Stock Analyst Update

Expect More Positives Than Negatives from Wells Fargo

The bank is currently trading at one of the highest risk adjusted discounts to our fair value estimate among the U.S. money center and regional banks.

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 Wells Fargo (WFC) is one of our top banking picks entering 2019, as the bank is currently trading at one of the highest risk adjusted discounts to our fair value estimate among the U.S. money center and regional banks. We believe shares are worth $67, which is 13.5 times our 2019 earnings estimate and 2.1 times tangible book value as of September 2018. 

Wells recently came to a settlement with the Attorneys General of all 50 states (as well as the District of Columbia) in regards to many of the already disclosed issues the bank is facing. This settlement covered the fake accounts sales practices, the unnecessary auto insurance issues, and the mortgage rate lock issues. The bank agreed to pay a total of $575 million to resolve the civil claims related to these. Wells had already accrued $400 million for these items, meaning an additional $175 million would be needed in its fourth-quarter earnings. We note that Wells had already been fined by regulators for these issues, therefore we would expect much, if not all of the liabilities resulting from these specific items to be closed.

Overall, we believe this is how 2019 will play out for Wells Fargo, as the bank settles outstanding items and puts much of the last three years in the rear view mirror. As the news cycle runs out of new negative items to report, the bank increasingly puts old issues behind it, and more normal levels of profitability return to the bank, we would not be surprised to see sentiment change over time. The next big item we expect an update on would be progress on getting the asset cap lifted.

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