Yahoo Finance

Wide-moat

Wells Fargo WFC continued to wade through multiple issues in the quarter. The bank, as expected, recorded another $175 million legal accrual related to a settlement with the Attorneys General of all 50 states (as well as the District of Columbia) with regards to many of the already disclosed issues the bank is facing. There were a number of other one-time items in the quarter, making overall numbers somewhat noisy. That being said, net income was down roughly 1.5% compared with the same quarter last year, with share repurchases helping to lift EPS to $1.21, up from $1.16. The return on average tangible common equity did improve to 15.4%, and despite the weaker revenue growth, management was able to get the expense base to the lower end of their target range. We like the improving returns on equity, the strong growth in card and C&I loans, and the decreasing expense base, however, the announcement that the asset cap will stay in place for all of 2019 was a significant negative. We still believe the bank has meaningful room to improve returns on equity with further expense management, and we do not believe the bank needs significant revenue growth to improve its returns, but it will be a bumpy ride to get there as long as the bank remains under the regulatory microscope. We are currently modelling almost no revenue growth through 2021. Based on our updated forecasts, we are lowering our fair value estimate to $65 from $67. The bank was able to repurchase roughly 3% of shares outstanding in the quarter, which we believe is value-accretive, and the bank has a dividend yield of over 3.5%, which should make it a little easier to wait for the story to play out.