Company Overview: Wells Fargo & Company is a bank holding company. The Company is a diversified financial services company. It has three operating segments: Community Banking, Wholesale Banking, and Wealth and Investment Management. The Company offers its services under three categories: personal, small business and commercial. It provides retail, commercial and corporate banking services through banking locations and offices, the Internet and other distribution channels to individuals, businesses and institutions in all 50 states, the District of Columbia and in other countries. It provides other financial services through its subsidiaries engaged in various businesses, including wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance, commercial finance, securities brokerage and investment banking, computer and data processing services, investment advisory services, mortgage-backed securities servicing and venture capital investment.


WFC Details

Banking Group, Wells Fargo & Co (NYSE: WFC) is aiming to bring a turnaround to its financial performance in the coming years. A better than expected net interest margin and lower than forecast loan loss provision were noted for the second quarter of 2018 while expenses and lower loan and deposit balances were some of the drags. The group’s dividend yield and returns with share repurchases have been decent. The group is also trying to re-set its fundamentals based on management team’s expertise and business mix. Rise in interest rates can benefit in terms of retail sales.

On track on developing Digital capabilities: Wells Fargo & Co (NYSE: WFC) is putting efforts to maintain their priority of customer satisfaction via focus on innovation. During the first quarter of 2018, they launched their online mortgage application, which depicted a rise to 23% of all retail applications in June. During the second quarter of 2018 they launched iPrint biometric log-on capabilities for their commercial customers. The group rolled out simplified, standard Merchant Services pricing for eligible small business customers. They even announced the newly enhanced Propel Card, one of the richest, no-annual-fee rewards cards in the industry. As per the consumer banking business metrics, Teller and ATM transactions rose 2% to 351.4 million during the second quarter as compared to the last quarter but fell 5% on a year on year (YoY) basis on the back of ongoing customer migration to virtual channels. Total digital secure sessions rose 6% to 1,675.0 million, against last quarter while rose 17% on a YoY basis on the back of a better usage and ongoing rise in digital adoption. Digital (online and mobile) active customers rose to 28.9 million, against last quarter while the same were up 4% on a YoY basis. Mobile active customers rose 1% to 22 million against last quarter while the same surged 8% on a YoY basis. Primary consumer checking customers rose 1.1% yoy to 23.9 million, against pcp while consumer general purpose credit card active accounts rose 2% to 7.8 million against previous quarter. On the other hand, >362,000 branch customer experience surveys that were finished during second quarter 2018, with both ‘Loyalty’ scores and ‘Overall Satisfaction with Most Recent Visit’ scores fell on several factors, including recent events and a risk-based policy change affecting individuals making cash deposits into an account on which they are not a signer.


Community Banking metrics (Source: Company reports)

Improving capital position: The group’s Common Equity Tier 1 ratio (fully phased-in) reached 12.0% as of June 2018 which was better than the regulatory minimum and their internal target was 10%. The group returned $4 billion to shareholders through common stock dividends and net share repurchases comprised entering into a $1 billion forward repurchase transaction during the quarter. The group intends to use over 60% of the gross repurchase capacity under their capital plan during the second half of 2018. On September 17, 2018, they intend to redeem all of the 8.00% non-cumulative perpetual class A preferred stock, series J, and corresponding depositary shares. The series J. preferred would be redeemed at price equal to $1,000/share or $25 per depositary share.

Better Credit quality: For the second quarter, the Net charge-offs fell to $602 million, against last quarter. The group has $150 million reserve release indicating a solid credit portfolio performance, as well as lower loan balances. Net charge-offs rate reached 0.26%, falling 6 bps against last quarter. Commercial losses fell 1 basis point to 5 bps. Consumer losses reached 49 bps, falling 11 bps against last quarter impacted by lower loss rates and higher recovery rates, including seasonally lower automobile and credit card loan losses. NPAs fell $305 million against last quarter. Nonaccrual loans fell $233 million as a $282 million fall in consumer real estate nonaccruals was partially offset by a $46 million increase in commercial nonaccruals.


Credit quality (Source: Company reports)

Financial performance: For the second quarter of 2018, the group’s noninterest income fell $684 million while net interest income (NII) in the second quarter was $12.5 billion, up $303 million compared with first quarter 2018.Card fees rose $93 million on the back of rising credit and debit card purchase volumes. But Mortgage banking fell $164 million on $102 million lower gains on mortgage origination activity on the back of a decrease in production margin due to pricing competition, and $62 million lower mortgage servicing income on higher loan prepayments. Market sensitive revenue fell $500 million boosted by $488 million lower net gains from equity securities on lower unrealized gains and a $214 million impairment on the announced sale of WFAM’s majority stake in RockCreek. Other income fell $117 million due to fall in gains on the sale of Pick-a-Pay PCI loans. The group’s top line was also under pressure this quarter with a fall of $381 million to $21.6 billion. NII rose $303 million boosted by $120 million less negative impact from hedge ineffectiveness accounting, the net benefit of rate and spread movements, and one additional day in the quarter. NIM rose 9 bps to 2.93%.The group accrued $171 million in customer remediation and rebate costs.


Noninterest expense performance (Source: Company reports)

Balance sheet position: The group’s loans fell $3.0 billion on lower auto, legacy consumer real estate and commercial real estate loans. The Commercial loans fell $291 million against last quarter driven by rising commercial & industrial loans which has more than offset the commercial real estate loans pressure. Consumer loans fell $2.8 billion as growth in nonconforming mortgage loans and credit card loans offset auto and legacy consumer real estate loans pressure due to run-off, sales and credit discipline. Total period-end loans fell $13.1 billion on a YoY basis impacted by auto and legacy consumer real estate portfolios pressure including Pick-a-Pay and junior lien mortgages, as well as falling commercial real estate loans. The Total period-end loans fell $3.0 billion against last quarter due to falling consumer loans and lower commercial real estate loans. However, the Total average loan yield rose 14 bps to 4.64% as compared to last quarter on the back of the repricing impacts of higher interest rates. Trading assets rose $2.6 billion on rising debt securities held for trading. Debt securities (AFS and HTM) fell $3.2 billion as ~$14.4 billion of gross purchases, primarily agency mortgage-backed securities (MBS) in the available sale portfolio, has more than offset by run-off and sales. On the other hand, Deposits fell $34.8 billion impacted by seasonality, commercial and Wealth and Investment Management (WIM) customers allocating more cash to alternative higher-rate liquid investments.


Loans outstanding (Source: Company reports)

Improving risk management: The group has made risk management their utmost priority, which comprises their compliance and operational risk management program. They continue to focus on satisfying the requirements of the Federal Reserve, OCC and CFPB consent orders. But the asset cap related to the Federal Reserve's consent order impacted the group’s ability to grow their core lending and deposit taking businesses.

Stock performance: The group recently cleared requirements of the consent order that was received in 2016 September with the Office of the Comptroller of the Currency related to compliance with provisions of the Servicemembers Civil Relief Act. To meet the order requirements, the group expanded their SCRA Center of Excellence (COE) to ensure all eligible customers could be cared for, in a consistent and appropriate way. They even implemented processes to offer SCRA benefits and protections to eligible service members without requiring them to submit their written orders. The group started quarterly checks of the Department of Defense’s military database to identify customers wherein they can automatically enroll for SCRA protections and benefits. The group delivered remediation funds to service members as part of the consent order. On the other side, as per their 2018 capital plan, the group intends to raise their quarterly common stock dividend to 43 cents a share, which is an increase of 10% against last quarter. The dividend yield is at 2.95% while the group intends to pay dividends on September 1, 2018. The group is committed to operating more efficiently, and is on track to achieve their targeted $4 billion of expense reductions by the end of 2019. The performance of Wells Fargo shares improved over 8.2% in the last four weeks (as of July 25, 2018) with a one year rise of 5.76% and we believe that the bullish momentum would continue going forward. Based on the foregoing, we give a “Buy” on the stock at the current price of $ 58.23.
 

WFC Daily Chart (Source: Thomson Reuters)

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