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Wells Fargo: Where Is The Upside?

May 03, 2018 1:17 AM ETWells Fargo & Company (WFC)BAC, JPM28 Comments
Labutes IR profile picture
Labutes IR


  • Some investors believe that Wells Fargo can increase earnings due to higher interest rates, lower corporate taxes and cost-cutting initiatives.
  • This seems to be already priced-in and further upside to current expectations seem difficult to emerge.
  • Wells Fargo doesn’t seem to have much upside and is presently a sell.

I’ve recently analyzed Wells Fargo (NYSE:WFC) and rated it a sell, due to concerns about low growth prospects and a relatively high valuation. I’ve received some pushback on this call, as readers seem to think that Wells Fargo can increase earnings in the next few years, supported by higher interest rates, a lower corporate tax and expense reductions.

The first two factors are outside of the bank’s management control and are positive tailwinds for all banks, while cost-cutting is where the bank can beat current expectations. In this article, I analyze these three bullish arguments in more detail, as the negative issues like litigation and the asset cap are usually accepted as valid arguments for a bear case.

Interest Rates

Theoretically, higher interest rates are good for banks because asset margins tend to increase more rapidly than liabilities margins, leading to higher overall business margins assuming a stable balance sheet.

This means that net interest margin [NIM] is expected to expand in a rising interest rate environment, like the one experienced in the U.S. over the past couple of years.

However, interest rate sensitivity is not the same for all banks, depending on the asset and funding structure. For instance, banks with higher funding coming from non-interest bearing deposits should see NIM expanding faster than banks with more reliance on wholesale funding or interest-bearing deposits.

Over the past few quarters, Wells Fargo has reported slightly lower loans outstanding ($951 billion in 1Q18 vs.$963.6 billion in 1Q17), but average loan yields have increased, from 4.26% in 1Q17 to 4.50% in the most recent quarter. This is positive for Wells Fargo’s top-line, as it receives higher income from loans outstanding.

Source: Wells Fargo.

On the other hand, average deposits have been quite stable near $1.3 trillion, but the average cost of deposits has doubled in

This article was written by

Labutes IR profile picture
Labutes IR is an Fund Manager specialized in the financial sector, with more than 15 years' of experience in the financial markets. Under my coverage is mainly the Financial sector, including Banks, Insurance, Real Estate, and FinTechs both in the European and U.S. markets. For my personal investments, I also invest on 'Income' stocks across several sectors as I'm building a portfolio for retirement, being my goal to retire in about 20 years. Associated with the existing author The Outsider.

Analyst’s Disclosure: I am/we are short WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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