Closing Consent Orders And Auto Partnerships Will Improve Efficiency

Key Takeaways

• Strengthening risk controls and closing consent orders may reduce regulatory burdens and enhance operational efficiency, positively impacting earnings.
  
• Diversifying into fee-based revenue and strategic partnerships in credit and auto sectors aims to boost revenue stability and growth.
  
• Economic and regulatory uncertainties, reliance on fee-based revenue, and risks related to commercial real estate could negatively impact Wells Fargo's earnings and margins.

Catalysts

A financial services company, provides diversified banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally.

• Wells Fargo is making significant progress in closing out consent orders and strengthening risk and control measures, which may reduce regulatory burdens and allow for improved operational efficiency, potentially impacting earnings positively.
  
• Expansion in fee-based revenue streams, such as investment banking, advisory fees, and wealth management, are strategies aimed at diversifying income away from net interest income, potentially boosting revenue stability and growth.
  
• Investments in the credit card business, including leadership changes and new partnerships, are expected to increase balances and customer engagement, positively impacting revenue growth and net margins.
  
• The launch of Volkswagen and Audi as preferred financing partners in the auto business with a focus on diversified loan products could drive loan growth and improve net interest margins.
  
• Strong capital position and continued share buybacks signal confidence in future earnings growth and shareholder value, with direct positive implications for earnings per share (EPS).

Wells Fargo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wells Fargo's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.5% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $21.5 billion (and earnings per share of $7.28) by about April 2028, up from $18.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $18.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the US Banks industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 6.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

Wells Fargo Future Earnings Per Share Growth

Risks

• Reduced reliance on net interest income due to declining net interest rates could negatively impact revenue and margins if fee-based revenue does not compensate sufficiently for the shortfall.
  
• Potential economic weakness could lead to lower loan growth and affect revenue, with the risk of revenue decline if consumer and commercial credit deteriorates or demand falters.
  
• Exposure to commercial real estate, particularly the office portfolio, remains a risk, potentially impacting credit quality and resulting in higher charge-offs, which can depress earnings.
  
• Regulatory and economic uncertainty, including potential changes in monetary policy and trade disputes, could lead to a volatile interest rate environment and affect net interest income projections, thereby impacting earnings.
  
• Execution risk associated with regulatory consent orders and strategic initiatives could result in unforeseen expenses or prolonged uncertainty, which may affect net margins and earnings.

Valuation

• The analysts have a consensus price target of $78.357 for Wells Fargo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $93.3 billion, earnings will come to $21.5 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $63.98, the analyst price target of $78.36 is 18.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.