2023-03-21 10:32:21 ET
Summary
- WFC recorded a relatively modest unrealized loss-to-equity ratio of 6.9%, compared to its big bank peers, such as JPM at 5.6%, BAC at 7.2%, and C at 18.9%.
- With only 36.9% of its deposits uninsured, WFC appeared to be at a lower risk of a bank run, significantly aided by its excellent liquidity and the regulators' lending program.
- Combined with its growing NII and NIM, we reckon WFC's prospects remain more than decent, bolstered by its medium-term target of 15% in RoTCE.
Investment Thesis
US Banking Stocks Since March 06, 2023
The recent banking event contributed to Wells Fargo's ( WFC ) arguably undeserved sell-off, tumbling by -19.28% since March 06, 2023. It is important to highlight that the stock had the worst plunge compared to its big peers as well, suggesting Mr. Market's growing pessimism on its forward execution.
Unrealized Gains (or Losses) On Investment Securities For US Banks
FDIC, The Washington Post
Much of the market concerns were concentrated on the Fed's continuous rate hikes, triggering the unintended effect of devaluing fixed-income securities. This resulted in the staggering $620B in unrealized losses reported by the US banks in 2022, with losses likely to further expand due to the projected terminal rate of up to ~5.75% in 2023.
Given the painful impacts on SVB Financial ( SIVB ), Signature Bank ( SBNY ), and Credit Suisse ( CS ) thus far, it appeared that the pessimism surrounding banks might persist a little longer, until the rising inflation has been tamped down and/or a Fed pivot occurs.
WFC recorded a similar issue, with expanding unrealized losses of $8.13B (+356.7% YoY) in available-for-sale ((AFS)) securities and $41.53B (+11,309% YoY) in held-to-maturity ((HTM)) debt securities in FY2022 .
However, while the bank's ratio might seem elevated at 6.6% (+5.6 points YoY) for AFS unrealized losses and 13.9% (+13.8 points YoY) for HTM, these were not a concern yet, given liquidity and the extended weighted average expected maturity of 5.4 (+0.2 years YoY) and 8.1 (+1.8 years YoY) years, respectively.
Furthermore, WFC boasted a relatively decent unrealized loss-to-equity ratio of 6.9%, compared to its big bank peers, such as JPMorgan ( JPM ) at 5.6%, BAC ( BAC ) at 7.2%, and Citigroup ( C ) at 18.9%.
The bank also recorded excellent total deposits of $1.38T (-6.7% YoY) by the latest fiscal year, with only $510B (-13.5% YoY)/ 36.9% (+2.9 points YoY attributed uninsured. It was important to highlight that the uninsured ratio was relatively modest compared to its big bank peers as well, such as JPM at 56%, BAC at 37.9% , and C at 85.2% in FY2022.
With an excellent Liquidity Coverage Ratio ((LCR)) of 122% (+4 points YoY) and High-Quality Liquid Assets (HQLA) of $354.78B (-7.4% YoY), it seems that WFC had adequate liquidity to weather the short-term uncertainty.
This was significantly aided by the provision of additional liquidity from regulators as well, with the Federal Reserve already lending $153B to multiple banks over the past week from its 90-day discount window program.
Meanwhile, WFC recorded an excellent Net Interest Income ((NII)) growth to $44.95B (+25.6% YoY), with a guidance of up to $49.5B in FY2023 ( +10% YoY ). We believe this could bring its Net Interest Margin ((NIM)) to ~3.4% in the next fiscal year, suggesting a tremendous expansion in profitability from 3.14% in FQ4'22 , 2.11% in FQ4'21 , 2.16% in FQ4'20, and 2.53% in FQ4'19 . It is apparent that the Fed's rising interest rates have positively contributed to this cadence for now.
However, investors still need to closely monitor the bank's deposit costs ahead, due to the tremendous jump from 0.02% in FQ4'21 to 0.46% in FQ4'22, significantly impacted by the customers' rotation of funds to higher-yield alternatives, such as CDs/ treasury bills/ money market funds. These may pose headwinds to its NII and NIM in the near term, in our view, though still notably moderated against the deposit costs of 0.62% in FQ4'19 .
In addition, with a non-GAAP Return on average Tangible Common Equity (RoTCE) of 9% in FY2022, compared to 12.2% in FY2019 , WFC's efficiency initiatives since 2020 appear to remain a work in progress. This was a notable shortfall compared to JPM at 18% and BAC at 15.1% , but C was only at 8.9% at the same time.
Nonetheless, with a medium-term target of 15% in RoTCE, we reckon the bank may continue to return capital to its shareholders while focusing on businesses with higher returns. For now, it had already repurchased $23.9B of shares, while paying out $15.05B of dividends over the past three years, with more share repurchases expected in FQ1'23.
While it remains to be seen when WFC may achieve its ambitious target, its shares outstanding have already been drastically reduced by -13.3%/ 0.59B since FY2019, suggesting an excellent cadence thus far. Furthermore, it has trimmed $7.5B in expenses and -11% in headcount since FY2020, suggesting a smaller and more nimble team.
Combined with the influx of new customers flowing to big banks over the past week, we reckon WFC's prospects remain more than decent despite the uncertain macroeconomic outlook.
So, Is WFC Stock A Buy , Sell, Or Hold?
WFC 1Y Price/Sales and P/E Valuations
WFC is currently trading at an NTM Price/ Sales of 1.79x and NTM P/E of 7.63x, lower than its 3Y pre-pandemic mean of 2.89x and 11.75x, respectively. Otherwise, it is still moderated from its 1Y mean of 2.16x and 9.38x, respectively.
Based on its projected FY2024 EPS of $5.26 and 1Y mean P/E valuation, we are looking at a moderate price target of $49.33, suggesting an excellent upside potential of 31.6% from current levels.
WFC 5Y Stock Price
We believe investors need not fret about the drastic correction, since it only provides an excellent opportunity to add near 10-year lows, aside from the pandemic bottom. Combined with the fact that it is trading near its June 2022 support level and way below its 50/ 100/ 200-day moving averages, we are rating the WFC stock as a Buy here.
Based on its annualized FQ1'23 dividends of $0.30, we are also looking at an excellent forward yield of 3.17% based on the current stock prices, compared to its 2022 average of 1.98% and sector median of 3.03%.
However, as a result of the uncertain macroeconomic outlook, WFC may face more challenges as it strives to achieve its ambitious efficiency goal. Therefore, while the entry point is attractive, investors that add here should have a medium to long-term investing trajectory as well.
For further details see:
Wells Fargo: Banking Crisis Leading To A Discount Buy Opportunity