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Wells Fargo (WFC) Slashes Financial Targets on Macro Woes
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At Investor Day held on May 24, Wall Street biggie – Wells Fargo & Company (WFC - Free Report) – announced the reduced financial targets in the wake of persistently low interest rates and stricter regulations. Moreover, as per Chief Financial Officer John Shrewsberry, the bank was recording lower returns as compared to the set targets.
“It looks very different frankly than we would have imagined a couple of years ago,” he said.
New Targets
Amid the current challenging environment for the banking industry, Wells Fargo targets Return on equity (ROE) of 11–14%, lower than previous 12–15% announced in 2014. The company also cut the Return on assets (ROA) target to 1.10–1.40% from 1.30–1.60%.
Slow economic growth, higher compliance related costs, low interest rate environment, spread compression in commercial loans led to the trimmed down targets. Notably, management targets ROE of 13.5% and ROA of 1.07% for 2016.
Further, reiterating its guidance, Wells Fargo anticipates year-over-year growth in net interest income in 2016 despite a rise in interest rates. Notably, Wells Fargo recorded 3% growth in revenues in the period 2013 to 2015, attributed to large base of deposits.
Further, after Federal Reserve hinted at an interest rate hike in June, Wells Fargo pruned its net interest margin to increase by 5–15 basis points if the yield curve increases by 100 basis points, lower than the previous guidance of a 10 to 30 basis point increase.
Moreover, Wells Fargo plans to carry on with its expense control initiatives and shareholder-friendly programs.
In its presentation, Wells Fargo said it expected "continued stress" in its book of oil and gas loans throughout 2016. "More credit losses will be realized and there is the potential for additional reserve builds," the bank added.
Therefore, approximately 66% of the loans to energy exploration and production companies have been reduced by the bank following the slump in oil prices.
Apart from setting targets, Wells Fargo announced certain strategic moves. It aims an investment and partnership with roboadviser-type offerings by the end of second-quarter 2016. Notably, Roboadvisers deals with client money digitally using algorithms which is preferred by investors as they have to pay lower fees.
Wells Fargo's planned deal will allow it to capture smaller clients who want to manage their own investments, David Carroll, head of wealth and investment management, said at investor day.
"We are working hard, fast and furious to adopt [a roboadviser] capability at Wells Fargo," he stated, without providing further details about the partner or size of the deal.
Conclusion
We believe that in the long term, investors will not be disappointed in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. Going forward, we believe that strategic deals will help the company expand its business, boost profitability and meet targets.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold). Some better-ranked finance stocks include The Bank of New York Mellon Corporation (BK - Free Report) , Enterprise Financial Services Corp. (EFSC - Free Report) and Farmers National Banc Corp. (FMNB - Free Report) . All the three stocks carry a Zacks Rank #2 (Buy).
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Wells Fargo (WFC) Slashes Financial Targets on Macro Woes
At Investor Day held on May 24, Wall Street biggie – Wells Fargo & Company (WFC - Free Report) – announced the reduced financial targets in the wake of persistently low interest rates and stricter regulations. Moreover, as per Chief Financial Officer John Shrewsberry, the bank was recording lower returns as compared to the set targets.
“It looks very different frankly than we would have imagined a couple of years ago,” he said.
New Targets
Amid the current challenging environment for the banking industry, Wells Fargo targets Return on equity (ROE) of 11–14%, lower than previous 12–15% announced in 2014. The company also cut the Return on assets (ROA) target to 1.10–1.40% from 1.30–1.60%.
Slow economic growth, higher compliance related costs, low interest rate environment, spread compression in commercial loans led to the trimmed down targets. Notably, management targets ROE of 13.5% and ROA of 1.07% for 2016.
Further, reiterating its guidance, Wells Fargo anticipates year-over-year growth in net interest income in 2016 despite a rise in interest rates. Notably, Wells Fargo recorded 3% growth in revenues in the period 2013 to 2015, attributed to large base of deposits.
Further, after Federal Reserve hinted at an interest rate hike in June, Wells Fargo pruned its net interest margin to increase by 5–15 basis points if the yield curve increases by 100 basis points, lower than the previous guidance of a 10 to 30 basis point increase.
Moreover, Wells Fargo plans to carry on with its expense control initiatives and shareholder-friendly programs.
In its presentation, Wells Fargo said it expected "continued stress" in its book of oil and gas loans throughout 2016. "More credit losses will be realized and there is the potential for additional reserve builds," the bank added.
Therefore, approximately 66% of the loans to energy exploration and production companies have been reduced by the bank following the slump in oil prices.
Apart from setting targets, Wells Fargo announced certain strategic moves. It aims an investment and partnership with roboadviser-type offerings by the end of second-quarter 2016. Notably, Roboadvisers deals with client money digitally using algorithms which is preferred by investors as they have to pay lower fees.
Wells Fargo's planned deal will allow it to capture smaller clients who want to manage their own investments, David Carroll, head of wealth and investment management, said at investor day.
"We are working hard, fast and furious to adopt [a roboadviser] capability at Wells Fargo," he stated, without providing further details about the partner or size of the deal.
Conclusion
We believe that in the long term, investors will not be disappointed in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. Going forward, we believe that strategic deals will help the company expand its business, boost profitability and meet targets.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold). Some better-ranked finance stocks include The Bank of New York Mellon Corporation (BK - Free Report) , Enterprise Financial Services Corp. (EFSC - Free Report) and Farmers National Banc Corp. (FMNB - Free Report) . All the three stocks carry a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>