Thematic evaluation
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Wells Fargo & Co. (WFC)

October 09, 2024

Compared to: Bank of America Corp. (BAC) | JPMorgan Chase & Co. (JPM) | Financial Select Sector SPDR Fund (XLF)

Our reasoning

Wells Fargo appears moderately undervalued based on its below-average P/E ratio, strong ROE, and potential for growth in new business areas. The company's ongoing regulatory challenges and risks are already reflected in its current valuation, while its diversification efforts and strong capital position provide upside potential that isn't fully priced in.

Key takeaways
  • Wells Fargo is a diversified financial services company with a strong capital position and liquidity, but faces significant regulatory and legal challenges.
  • The company's financial performance has been mixed compared to its peers, with lower annualized returns and higher volatility.
  • Wells Fargo's valuation metrics suggest that the company is undervalued relative to its peers.
  • The company's recent price performance has been positive, outperforming the benchmark XLF and its peers JPM and BAC in the last 60 days.
  • Key financial metrics to monitor include net interest income, loan growth, deposit trends, and loan loss provision trends.
  • Wells Fargo is a company with a strong core business and a focus on growth and efficiency, but its regulatory and legal challenges, as well as its higher risk profile, are important considerations for investors.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Wells Fargo & Co. is a diversified financial services company operating across banking, insurance, investments, mortgage products and services, and consumer and commercial finance. The company operates through four segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth & Investment Management.
    • Wells Fargo's primary revenue sources are interest income, non-interest income, and securities gains. Interest income is generated from loans and other interest-bearing assets, while non-interest income includes fees from various services like investment banking, credit cards, and wealth management.
    • The company targets a wide range of customers, including consumers, small businesses, middle market companies, large corporations, governments, and high-net-worth individuals.
    • We will be comparing Wells Fargo's performance to the Financial Select Sector SPDR Fund (XLF) as a benchmark and to its industry peers JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC).

  2. Financial Performance:

    • Wells Fargo's revenue growth has been driven by the higher interest rate environment, but non-interest income has faced headwinds. The company's strategic initiatives to diversify revenue sources and grow the credit card and corporate investment banking businesses are likely contributing to the increasing non-interest income.
    • The company's profitability is improving, with increasing operating income and net income. However, increasing operating expenses are a concern, and the company is focused on driving efficiency initiatives. The increasing loan loss provision suggests a potential deterioration in credit quality, which could impact future earnings.
    • Wells Fargo's ROA and ROE are above the industry average, suggesting efficient asset utilization and strong profitability relative to shareholder investment. However, the company's ROTC and ROIC are below the industry average, indicating a potential need to improve capital efficiency.
    • Compared to its peers, Wells Fargo's financial performance has been mixed. While it outperformed BAC in the 2-year and 3-year periods, it underperformed both JPM and BAC in most other periods, including the most recent year-to-date period. This suggests that WFC's performance has been inconsistent and less robust than its peers.

  3. Operational Efficiency:

    • Wells Fargo's balance sheet reflects a strong capital position and liquidity, with increasing cash and investments. The increasing operating cash flow suggests a strong short-term liquidity position.
    • The company's reliance on debt financing is evident in the increasing total debt. However, the company's ability to generate free cash flow and manage debt obligations indicates a healthy long-term solvency position.
    • The company's low CapEx suggests a focus on organic growth and efficiency initiatives.
    • Wells Fargo's free cash flow has been strong, driven by its core business operations and efficiency initiatives. The company's investment activities are likely to remain relatively conservative in the near term.
    • The company's capital allocation strategy is expected to continue to prioritize organic growth and efficiency initiatives.
    • Wells Fargo's current ratio and quick ratio are above the industry average, indicating a strong short-term liquidity position. However, the company's total debt to total equity ratio of 171.39 is above the industry average, indicating a high level of financial leverage.

  4. Growth Opportunities:

    • Wells Fargo is focused on diversifying its revenue sources and reducing reliance on net interest income. The company is growing its credit card and corporate investment banking businesses, which are expected to contribute to future revenue growth.
    • The company is also focused on improving advisor retention and serving independent advisors and consumer banking clients in the Wealth and Investment Management business.
    • Wells Fargo is investing in building its risk and control infrastructure to address regulatory matters. This investment is expected to improve operational efficiency and reduce future compliance costs.
    • The company's capital allocation strategy is expected to continue to prioritize organic growth and efficiency initiatives.

  5. Risks and Threats:

    • Wells Fargo continues to face significant regulatory and legal challenges that have impacted its operations and financial performance. The company has incurred significant fines and penalties related to past misconduct, and it is subject to ongoing investigations and consent orders.
    • The increasing loan loss provision suggests a potential deterioration in credit quality, which could impact future earnings.
    • The decreasing customer deposits could be a concern, as it may impact net interest income.
    • The company's reliance on debt financing is a potential risk, as it increases financial leverage.
    • The financial services industry is highly competitive, with increasing competition from non-bank institutions and technological advancements.

  6. Valuation Analysis:

    • Wells Fargo's valuation metrics, such as P/E and EV/EBITDA, are currently below the industry average. This suggests that the company is undervalued relative to its peers.
    • The company's recent price performance has been positive, outperforming the benchmark XLF and its peers JPM and BAC in the last 60 days. This suggests that investors are becoming more optimistic about the company's future prospects.

  7. Price Performance:

    • Wells Fargo's historical price performance has been mixed compared to its peers. While it outperformed BAC in the 2-year and 3-year periods, it underperformed both JPM and BAC in most other periods, including the most recent year-to-date period. This suggests that WFC's performance has been inconsistent and less robust than its peers.
    • WFC's annualized returns have been lower than JPM's in all periods, indicating that JPM has generated higher returns for investors. However, WFC has outperformed BAC in the 2-year and 3-year periods, suggesting that it may offer a more attractive return profile compared to BAC.
    • WFC's annualized volatility has been consistently higher than JPM's and BAC's, indicating that WFC is more susceptible to market fluctuations and carries a higher risk profile.
    • WFC's maximum drawdown of 37.1% in Q1 2023 was higher than JPM's 38.77% in Q4 2022 and BAC's 43.75% in Q1 2023. This further reinforces WFC's higher risk profile, as it has experienced larger declines in value during market downturns.
    • WFC's Sharpe ratio has been consistently lower than JPM's, indicating that JPM has offered better risk-adjusted returns. This suggests that investors may be better off investing in JPM, as it has generated higher returns with lower risk.
    • WFC's beta value consistently above 1 indicates that it is more sensitive to market movements than JPM and BAC. This suggests that WFC's price is likely to fluctuate more than its peers during market swings, making it a riskier investment.

  8. Future Outlook:

    • Wells Fargo's financial performance is expected to remain strong, driven by its core business operations and efficiency initiatives. The company's profitability is expected to continue to improve, but the increasing operating expenses and loan loss provision could pose challenges.
    • The company's capital allocation strategy is expected to continue to prioritize organic growth and efficiency initiatives.
    • Key financial metrics to monitor include net interest income, loan growth, deposit trends, and loan loss provision trends.
    • The company continues to face significant regulatory and legal challenges that have impacted its operations and financial performance.

  9. Summary:

    • Wells Fargo is a diversified financial services company with a strong capital position and liquidity. The company is focused on diversifying its revenue sources and reducing reliance on net interest income. However, the company continues to face significant regulatory and legal challenges that have impacted its operations and financial performance.
    • The company's financial performance has been mixed compared to its peers, with lower annualized returns and higher volatility. Its maximum drawdown was also higher than its peers, further highlighting its higher risk profile. While WFC has outperformed BAC in some periods, its risk-adjusted performance, as measured by the Sharpe ratio, has been consistently lower than JPM's. WFC's higher beta suggests that it is more sensitive to market movements and carries a higher risk profile than its peers.
    • Wells Fargo's valuation metrics suggest that the company is undervalued relative to its peers. The company's recent price performance has been positive, outperforming the benchmark XLF and its peers JPM and BAC in the last 60 days.
    • Overall, Wells Fargo is a company with a strong core business and a focus on growth and efficiency. However, the company's regulatory and legal challenges, as well as its higher risk profile, are important considerations for investors.
Peer fundamentals 
Fundamentals
Insights
  • Wells Fargo's financial performance is expected to remain strong, driven by its core business operations and efficiency initiatives.
  • The company's profitability is expected to continue to improve, but the increasing operating expenses and loan loss provision could pose challenges.
  • The company's capital allocation strategy is expected to continue to prioritize organic growth and efficiency initiatives.
  • Key financial metrics to monitor include net interest income, loan growth, deposit trends, and loan loss provision trends.
  • The company continues to face significant regulatory and legal challenges that have impacted its operations and financial performance.
Analysis
  • Revenue - Wells Fargo's revenue growth is driven by the higher interest rate environment, but non-interest income is facing headwinds. - The company's strategic initiatives to diversify revenue sources and grow the credit card and corporate investment banking businesses are likely contributing to the increasing non-interest income. - The company's revenue growth is expected to continue to be driven by the higher interest rate environment, but non-interest income may remain under pressure.
    • Profitability
      • The company's profitability is improving, with increasing operating income and net income.
      • The increasing operating expenses are a concern, but the company is focused on driving efficiency initiatives.
      • The increasing loan loss provision suggests a potential deterioration in credit quality, which could impact future earnings.
      • The company's profitability is expected to continue to improve, but the increasing operating expenses and loan loss provision could pose challenges.
    • Liquidity
      • Wells Fargo's balance sheet reflects a strong capital position and liquidity, with increasing cash and investments.
      • The increasing operating cash flow suggests a strong short-term liquidity position.
      • The company's financial flexibility is strong, allowing for future investments or navigating potential economic downturns.
    • Solvency
      • The company's reliance on debt financing is evident in the increasing total debt.
      • The company's ability to generate free cash flow and manage debt obligations indicates a healthy long-term solvency position.
      • The total debt to total equity ratio of 171.39 is above the industry average, indicating a high level of financial leverage.
    • Operational Efficiency
      • The company's ROA and ROE are above the industry average, suggesting efficient asset utilization and strong profitability relative to shareholder investment.
      • The company's ROTC and ROIC are below the industry average, indicating a potential need to improve capital efficiency.
      • The company's low CapEx suggests a focus on organic growth and efficiency initiatives.
    • Cash Flow Analysis
      • Wells Fargo's cash flow is expected to remain strong, driven by its core business operations and efficiency initiatives.
      • The company's investment activities are likely to remain relatively conservative in the near term.
      • The company's capital allocation strategy is expected to continue to prioritize organic growth and efficiency initiatives.
    • Risk Factors
      • The increasing loan loss provision suggests a potential deterioration in credit quality, which could impact future earnings.
      • The decreasing customer deposits could be a concern, as it may impact net interest income.
      • The company's reliance on debt financing is a potential risk, as it increases financial leverage.
      • The company continues to face significant regulatory and legal challenges that have impacted its operations and financial performance.
    • Future Outlook
      • Wells Fargo's financial performance is expected to remain strong, driven by its core business operations and efficiency initiatives.
      • The company's profitability is expected to continue to improve, but the increasing operating expenses and loan loss provision could pose challenges.
      • The company's capital allocation strategy is expected to continue to prioritize organic growth and efficiency initiatives.
      • Key financial metrics to monitor include net interest income, loan growth, deposit trends, and loan loss provision trends.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-08)
Financial Select Sector SPDR Fund (XLF)
  • Performance Comparison:
    • WFC's historical performance has been mixed compared to XLF. While it outperformed XLF over the 1-year and 3-year periods, it underperformed over the 2-year, 6-month, and 3-month periods. This suggests that WFC's performance is not consistently better than XLF's.
    • WFC's performance has been more volatile than XLF's, with periods of significant outperformance followed by periods of underperformance. This indicates that WFC may be a riskier investment than XLF.
  • Risk and Return Analysis:
    • WFC's annualized returns have been higher than XLF's over the 1-year and 3-year periods, but lower over the 2-year period. This suggests that WFC may offer higher potential returns, but also carries higher risk.
    • WFC's annualized volatility has been consistently higher than XLF's, indicating that WFC is more volatile and therefore riskier than XLF.
    • WFC's maximum drawdown of 37.1% is significantly higher than XLF's maximum drawdown of 25.64%, indicating that WFC is more susceptible to significant price declines. This further supports the conclusion that WFC is a riskier investment than XLF.
  • Risk-Adjusted Performance:
    • XLF's Sharpe Ratio has generally been higher than WFC's, indicating that XLF has provided better risk-adjusted returns. This suggests that XLF may be a more efficient investment than WFC.
    • WFC's beta value has consistently been higher than XLF's, indicating that WFC is more sensitive to market movements. This suggests that WFC is a riskier investment than XLF, as its price is likely to fluctuate more in response to market changes.
  • Overall Assessment:
    • WFC has shown mixed performance compared to XLF, with periods of outperformance and underperformance. While it may offer higher potential returns, it also carries higher risk, as evidenced by its higher volatility, larger drawdowns, and lower Sharpe Ratio.
    • WFC's higher beta suggests that it is more sensitive to market movements than XLF, making it a riskier investment.
    • Investors seeking a more stable investment with a better risk-adjusted return may prefer XLF. However, investors with a higher risk tolerance and a longer investment horizon may consider WFC for its potential for higher returns.
Peers Price History(as of 2024-10-08)
Bank of America Corp. (BAC)JPMorgan Chase & Co. (JPM)
  • Performance Comparison:
    • WFC's historical performance has been mixed compared to its peers. While it outperformed BAC in the 2-year and 3-year periods, it underperformed both JPM and BAC in most other periods, including the most recent year-to-date period. This suggests that WFC's performance has been inconsistent and less robust than its peers.
  • Risk and Return Analysis:
    • WFC's annualized returns have been lower than JPM's in all periods, indicating that JPM has generated higher returns for investors. However, WFC has outperformed BAC in the 2-year and 3-year periods, suggesting that it may offer a more attractive return profile compared to BAC.
    • WFC's annualized volatility has been consistently higher than JPM's and BAC's, indicating that WFC is more susceptible to market fluctuations and carries a higher risk profile.
    • WFC's maximum drawdown of 37.1% in Q1 2023 was higher than JPM's 38.77% in Q4 2022 and BAC's 43.75% in Q1 2023. This further reinforces WFC's higher risk profile, as it has experienced larger declines in value during market downturns.
  • Risk-Adjusted Performance:
    • WFC's Sharpe ratio has been consistently lower than JPM's, indicating that JPM has offered better risk-adjusted returns. This suggests that investors may be better off investing in JPM, as it has generated higher returns with lower risk.
    • WFC's beta value consistently above 1 indicates that it is more sensitive to market movements than JPM and BAC. This suggests that WFC's price is likely to fluctuate more than its peers during market swings, making it a riskier investment.
  • Overall Assessment:
    • WFC's performance has been inconsistent and less robust than its peers, with lower annualized returns and higher volatility. Its maximum drawdown was also higher than its peers, further highlighting its higher risk profile. While WFC has outperformed BAC in some periods, its risk-adjusted performance, as measured by the Sharpe ratio, has been consistently lower than JPM's. WFC's higher beta suggests that it is more sensitive to market movements and carries a higher risk profile than its peers. Overall, the analysis suggests that WFC may not be the most attractive investment option compared to its peers, particularly for investors seeking lower risk and higher risk-adjusted returns.
Peers Fundamentals(as of 2024-06-30)
Bank of America Corp. (BAC)JPMorgan Chase & Co. (JPM)
  1. Market Position and Size:
    • WFC is the smallest of the three companies in terms of market capitalization, revenue, and net income. However, its market cap is not disproportionately small relative to its size. This suggests that WFC is a relatively well-valued company, but it is also a smaller player in the industry.
  2. Profitability and Efficiency:
    • WFC's profitability is slightly above the industry average, but significantly below its larger peers. This suggests that WFC is a relatively profitable company, but it has room for improvement in this area.
    • WFC's efficiency in generating returns is slightly above the industry average, but significantly below its larger peers. This suggests that WFC is a relatively efficient company, but it has room for improvement in this area.
  3. Financial Health and Stability:
    • WFC's liquidity position is slightly above the industry average, but significantly below its larger peers. This suggests that WFC has a relatively strong liquidity position, but it has room for improvement in this area.
    • WFC's debt position is significantly above the industry average, but significantly below its larger peers. This suggests that WFC has a relatively high debt burden, but it is not as high as its larger peers.
  4. Valuation and Market Perception:
    • WFC's valuation is significantly below its larger peers, but slightly below the industry average. This suggests that WFC is relatively undervalued by the market, but it is not as undervalued as its larger peers.
  5. Cash Flow and Capital Management:
    • WFC's cash flow generation strength is slightly above the industry average, but significantly below its larger peers. This suggests that WFC is a relatively strong cash flow generator, but it has room for improvement in this area.
  6. Growth and Future Prospect:
    • WFC's growth profile is characterized by a slowing growth rate, but with recent acceleration. This suggests that WFC's growth is sustainable in the short term, but it may face challenges in maintaining its growth rate in the long term.
  7. Potential for Investment:
    • WFC is a potentially attractive investment, but investors should be aware of the company's growth and debt risks.
  8. Key Risks and Considerations:
    • WFC's growth is lower than its peers, and it has a high debt burden. This suggests that WFC is a potentially attractive investment, but investors should be aware of the company's growth and debt risks.
  9. Overall Assessment:
    • WFC is a financially sound company, but it has room for improvement in terms of growth and debt management. WFC is a competitive player in the industry, despite its smaller size.