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

Shifting European investment banking business to Paris: Wells Fargo & Co (NYSE:WFC), a bank holding company is a diversified financial services group and is the third largest U.S. bank by assets with services into Community Banking and Wholesale Banking. WFC has now planned to shift its European investment-banking business to Paris following Brexit after the application for an investment-firm license in France. The new Paris-based unit will be known as Wells Fargo Securities Europe S.A. The company’s new subsidiary based in Paris is planned to serve capital markets and investment banking services for European and international customers that require access to the EU and the European Economic Area. The bank still plans to serve U.K. and non-EU customers from London and has given no indication whether this move would lead to job cuts in the U.K. or how many it would employ in Paris. The company currently employs about 1,000 people at its London office. Meanwhile, French Prime Minister Edouard Philippe had already announced in July that the country would ease financial regulations to EU minimums and plans to introduce new tax incentives to make Paris a more attractive finance hub. Further, Paris is competing with the other countries of Frankfurt, Dublin and Luxembourg to win over finance jobs in the wake of Britain’s departure from the EU next March. As per the Paris Europlace financial sector lobby, Paris is set to win 3,500 financial sector jobs leaving Britain due to Brexit. HSBC is expected to make up the bulk, with 1,000 jobs, while French banks are moving posts back to their base in Paris would add another 1,000 jobs. The rest would come from other banks and financial firms. The companies from all over the EU use London for currency trading, derivatives and managing investment funds. However, some EU policymakers want parts of these activities shifted to the continent after Brexit to avoid relying on a foreign financial centre. Wells Fargo is expected to make more announcements on its Brexit strategy in the near future.

Seeking Investment Firm License from the French Prudential Supervision and Resolution Authority: WFC has applied for its investment firm license from the French Prudential Supervision and Resolution Authority (ACPR), who is responsible for the supervision of the French banking and insurance sectors. The company is taking steps as part of the company’s Brexit strategy, which is anticipated to support the capital markets and investment banking needs of Wells Fargo’s customers within the European Union (EU) and European Economic Area (EEA) in a post Brexit environment. The investment firm license is expected to be held by Wells Fargo Securities Europe S.A. (WFSE) in Paris, France. It is planned strategically that WFSE, which will be a new subsidiary of WFC, will be the  provider of a range of capital markets and investment banking services to its European and international customers that require access to the EU and the EEA. Meanwhile, Wells Fargo Securities International Limited (WFSIL) is authorised and is regulated by the UK Financial Conduct Authority (FCA), which is currently the company’s broker dealer in the UK and is the provider of services related to equities, fixed income, currencies sales and trading, futures clearing and execution, debt capital markets origination, and investment banking advisory services to customers within the EU/EEA. Post Brexit, when Britain leaves EU in March 2019, the customers of WFC from the UK and most non-EU markets will continue to be served in the UK by WFSIL without any interruption and bottlenecks.


ROE Target (Source: Company Reports)

Working on cutting costs: In September, WFC had announced plans to cut 5 percent to 10 percent of its workforce over the next three years as part of an ongoing turnaround plan. WFC currently employs 265,000 people. WFC considers that due to changes in the consumer behavior, including a preference for digital self-service options, the bank is cutting jobs. The bank has already said that they are "on target" to meet its expense reduction goals. Moreover, WFC  that operates all over the U.S., is cutting branches in several locations. WFC has planned to sell more than 50 retail branches in the Midwest, and has planned to reduce the number of branches it operates to approximately 5,000 by the year 2020. As a result, WFC saw positive business trends in the third quarter. As per John Shrewsberry, the CFO, those trends included "growth in primary consumer checking customers, increased debit and credit card usage, and higher year-over-year loan originations in auto, small business, home equity and personal loans and lines.” At the end of third quarter 2018, WFC had 5,663 retail bank branches, which reflects 93 branch consolidations in the third quarter and 207 in the first nine months of 2018. Additionally, WFC expects to complete the previously announced divestiture of 52 branches in Indiana, Ohio, Michigan and part of Wisconsin in fourth quarter 2018.


Third Quarter 2018 Financial Highlights (Source: Company Reports)

Delivered Decent Result for the Third Quarter 2018: WFC for the third quarter of FY 18 has posted mixed results. The company’s competitors like J.P. Morgan had reported better-than-expected earnings and revenue, and Citigroup beat on earnings but fell short on revenue estimates. WFC in the third quarter of FY 18 has reported the earnings per share of $1.13, slightly missing the analysts’ estimates for the earnings per share. The company had reported the adjusted revenue of $21.9 billion in the third quarter of FY 18, beating the analysts’ estimates for revenue of $21.89 billion. The company’s net income grew 33 percent to $6 billion in the third quarter from last year. WFC’s net interest income in the third quarter is up $31 million to $12.6 billion from second quarter 2018. Net interest margin was 2.94 percent, up 1 basis point from the prior quarter. Moreover, in the third quarter, total average loans were down $4.6 billion to $939.5 billion from the second quarter. Commercial loans fell by $1.2 billion compared with June 30, 2018, predominantly due to a $2.8 billion decline in commercial real estate loans, partially offset by $1.5 billion of growth in commercial and industrial loans. Consumer loans declined by $746 million from the prior quarter. The total average deposits for third quarter 2018 were down by $5.0 billion to $1.3 trillion, from the prior quarter, as consumers continued to move excess liquidity to higher-rate alternatives. The average deposit cost for third quarter 2018 was 47 basis points, which is up 7 basis points from the prior quarter and 21 basis points from a year ago, primarily due to an increase in Wholesale Banking and Wealth and Investment Management deposit rates. Additionally, in the third quarter, nonperforming assets reduced by 5 percent, from second quarter 2018 to $7.6 billion.

Capital Management: For the third quarter, Capital continued to exceed WFC’s internal target, with a Common Equity Tier 1 ratio (fully phased-in) of 11.9 percent, down from 12.0 percent in the prior quarter. In third quarter 2018, WFC had repurchased 146.5 million shares of its common stock, which reduced period end common shares outstanding by 137.5 million. The company has also paid a quarterly common stock dividend of $0.43 per share.


Credit Quality (Source: Company Reports)

Stock Recommendation: WFC stock has fallen significantly in the past as the company is still handling the fallout from a number of regulatory investigations into its sales practices and other issues, and the company has been conducting its own review. As at October 17, 2018, Wells Fargo closed at $54.46, which is 8.36% above its 52-week low of $50.26, as the group is gaining momentum lately. The interest rates are rising, which is positive for big banks like WFC, as higher rates will boost interest income on mortgages, loans, and credit cards steadily higher. An early double digit upside to the price is expected in medium term (with EPS moving towards mid-single digit) while WFC is trading at a level of $54.46, finding support at $51.4 and resistance around $56. WFC is trading at a discount to the peers and has been in the oversold region for quite some time. Group’s strategy on expense savings with buybacks is expected to chart out better fundamentals. The consumers are also showcasing encouraging sentiments which with interest rate scenario can give good boost while outlook for credit has been better for the group as it has de-risked the loan portfolio. We give a “Buy” recommendation on the stock at the current price of $ 54.46.
 

WFC Daily Chart (Source: Thomson Reuters)

 
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