Shares of Wells Fargo & Company (WFC - Free Report) closed 1.7% higher yesterday, reflecting investors’ bullish stance on the bank’s impressive expense outlook and expectations of lower impact on earnings from the regulatory cap on assets.
During its Investors’ Day presentation held on May 10, Wells Fargo also mentioned that it expects to reward its shareholders with higher returns in the long term. It raised the higher end of its payout ratio target to 55-80% from 55-75% it had set in 2016.
However, net interest income, which makes up more than 55% of revenues, is expected to be ‘relatively stable’ in 2018. Management expects that lower earning assets and higher deposit costs might offset benefits from higher interest rates.
Let’s discuss the two keys takeaways of the presentation in details below.
Impressive Cost-Savings Plan
The Sans Francisco-based bank expects to reduce expenses by $2 billion in 2018, followed by another $2 billion in 2019. It plans to achieve most of these savings by streamlining its lines of businesses along with 300 branch closures.
The bank reiterated that it expects total noninterest expenses to be in the range of $53.5-$54.5 billion for 2018, excluding litigation and remediation accruals expenses.
Further, Wells Fargo’s chief financial officer, John Shrewsberry said that expenses for 2020 might be between $50 billion and $51 billion along with revenues consistent with 2017. However, he cautioned that it was not a formal projection and that the bank's will remain committed to improving revenues.
Such measures will help the bank combat the persistent legal expenses. Also, this move might enable it to invest in productive areas.
Lesser Impact on Earnings From Asset Cap, Time Period Might Extend
Considering Wells Fargo’s involvement in a horde of litigation issues, either due to poor risk control measures or supervision over employees, the Federal Reserve had ordered Wells Fargo to keep its assets under $1.95 trillion in February 2018.
At the time, the bank said that it expects the restriction’s impact on its net income after tax to be about $400 million. However, at the Investors’ Day Wells Fargo’s treasurer, Neal Blinde said that slow growth in loans and deposits balance helped in reducing the impact to about $100 million.
Also, after considering the restrictions, the bank was looking forward to continue building its balance sheet after a third-party review of its plans, to improve controls and governance, to be held in September 2018.
However, on May 10, the bank said that it expects to continue operating with the cap till the first part of 2019, in order to better enforce the plans to improve operations.
Wells Fargo’s CEO, Tim Sloan, has launched a new advertising campaign with an aim to gain back the lost reputation by highlighting steps it has taken to repay customers and change its practices. On the other hand, it continues to settle past misconducts and accept penalties.
It is uncertain when the bank will be able to get past the legal hassles and strict regulatory scrutiny. Further, unstable revenues remain another key concern for Wells Fargo. However, its expense control initiative might allow some room to deal with the negatives.
Shares of Wells Fargo have gained 3.1% over the past year, significantly underperforming the industry’s rally of 18%.
Wells Fargo currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
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M&T Bank Corporation (MTB - Free Report) has been witnessing upward estimate revisions for the last 60 days. Also, the company’s shares have risen nearly 16.5% in the last six months. It carries a Zacks Rank of 2, at present.
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