WFC Stock Forecast: Wells Fargo & Co Promises Growth Despite Macro-Economic Set-Backs

Opher Joseph  This WFC Stock Forecast article was written by Opher Joseph – Financial Analyst, I Know First.

Summary

  • The company has consistently beaten market expectations for the last four quarters in 2021 with an average earnings surprise of 34.41%.
  • A moderate increase in the FED rates would surely help the company gain substantial revenue as declared by the company.
  • Since the Ukraine war started on February 24th, 2022, WFC’s stock dived by 9.56% from $53.95 to $48.79 on March 4th, 2022.
Wells Fargo text | MoneyBlogNewz | Flickr
(Source: flickr.com)

Overwiew

Wells Fargo & Company is a bank holding company. The Company is a diversified financial services company. The Company provides banking, investment, and mortgage products and services, through banking locations and offices, the Internet, and other distribution channels to individuals, businesses, and institutions in states, the District of Columbia, and in countries outside the United States. The Company provides consumer financial products and services including checking and savings accounts, credit and debit cards, auto, mortgage and home equity, and small business lending. It provides other offerings like financial planning, private banking, investment management, and fiduciary services. The Company also provides financial solutions to businesses through products and services including traditional commercial loans and lines of credit, letters of credit, asset-based lending, trade financing, treasury management, and investment banking services.

Systematically Beating Market Expectations

Double-digit growth forecast for this year but risks remain - Faset
(Source: faset.org.uk)

The financial sector and world markets are certainly facing a volatile situation as the effects of the ongoing war are felt by everyone across the globe. Financial institutions due to their exposure in global markets are bound to take a hit in the dips caused due to this volatility. With no immediate solution in sight to end the war, and the economies facing huge inflationary pressure, the road to recovery is all the more choppy and uncertain. U.S. banks have thus far disclosed nearly $15 billion of exposure in Russia. Since the Ukraine war started on February 24, 2022, the stock of the company dived by 9.56% from $53.95 to $48.79 on March 4th, 2022.

In the period of macroeconomic uncertainty finding a mature recognizable company is as important as a find profitable company. Wells Fargo matches both of these criteria. According to GuruFocus, the companys’ Net Margin and ROE are equal to 27.75% and 10.83%, respectively. Moreover, the company has been beating market estimates for the last four quarters in 2021 with an average earnings surprise of 34.41%.

(source: Yahoo Finance)

Bank of America and Wells Fargo are two of the largest commercial banks in the country. They are also two of the most asset-sensitive, meaning more of the yields on their assets such as loans, fluctuate with the federal funds rate than do their liabilities such as deposits. In its recently released annual 10-K report, for the period ending on December 31st, 2021, Wells Fargo said that if the FED instantly raised its benchmark lending rate by 1% and longer-term rates followed suit in a parallel shift up, the bank would reap an additional $7.1 billion of NII over the next 12 months. Bank of America in its annual report disclosed that in the same situation, NII would rise a little more than $6.5 billion.

To further boost its profitability, Wells Fargo is considering divestment of its 20% stake in Shanghai Commercial Bank Ltd. which it has owned for decades as per unidentified sources. The potential sale could be followed by a series of disposals by the third-largest U.S. bank by assets. Last year, it agreed to sell its asset management business to a private equity consortium for about $2.1 billion. It’s also unloaded a commercial real estate firm and a retirement plan services unit in recent years.

(Figure 1: Valuation Ratios for WFC and Its Peers)

WFC has modest price ratios compared to its industry peers.  Since the company has done well in the recent past and has managed to perform even under unfavorable economic conditions, it has promising attributes which may make it perform better than its industry peers in this turbulent time.

Managing Global Uncertenty

Opportunity is often delivered in a fog of uncertainty." | Flickr
(Source: flickr.com)

Strong financials of WFC assure a certain buy on dips for the stock in the market, as it is seen as one of the top performers in the market even during turbulent times. Although the company has fared well despite the worsening macro-economic factors, the adverse effects of the war and the extent of its effects remain unpredictable on the economy and the financial sector. The length of such volatility also seems unpredictable, with no immediate solution to the conflict on hand, and the problems around the world continue to rise.  The inflationary pressure of these conditions on the US economy and the economies around the world would eventually start to show, having already on stock markets around the globe. Although, a moderate increase in Fed rates would surely help the company gain substantial revenue as declared by the company.

However, the inflationary pressure combined with external factors are causes of concern for the company in achieving its immediate growth plans. A substantial rate increase would eventually mean higher interest costs on its deposits, and also would hinder new borrowings by businesses due to higher borrowing costs, access to cheaper credit, and would further negate the positives of net higher earnings from the FED rate increases. 

The company has also been at the receiving end of various litigation fines due to rulings and class actions against it. The company paid billions in restitution in 2016, after a sales practice scandal came to light. In 2021, the bank paid $96 million to settle claims for its home mortgage consultants in California that were not paid properly under a commission-based pay structure. In 2020, the bank settled overtime pay claims by a nationwide class of nearly 9,000 employees for $35 million. Wells Fargo denied wrongdoing in both cases. Regardless, the financials of the company have managed to recover in spite of shelling out billions of dollars in outlay. The company is positive that it would be able to reach a benchmark 15% Return on Tangible Equity (ROTE) in the near future with the increase in interest rates, despite the regulatory restriction of $1.95 trillion on its asset capitalization imposed since 2018. Previously the company had stated that it would require the regulatory cap to be removed for it to achieve this 15% mark.

(source: GuruFocus.com)

WFC looks interesting in terms of Piotroski F-Score. Piotroski F-score is a number between 0 and 9 that is used to assess the soundness of a company’s financial position. A score of 7 may indicate that the company’s stock is undervalued and can be interpreted by investors as a good signal to buy the stock.

WFC Stock Forecast: Conclusion

With the negative macroeconomic environment in the markets due to the war, I recommend holding against pressure buying. Currently, it is not clear enough what the impact the current situation will have on the US economy in general and in the banking system in the particular. Despite the fact that I prefer to wait out till we get more understanding about the reaction of the US economy to the current international economic situation, the falling price of WFC certainly makes it a worthy buy at dips, with a decent 22% return on investment from the current price level.    

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the WFC stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.  

Past Success with WFC Stock Forecast

I Know First has been bullish on the WFC stock forecast in the past. On February 21st, 2021 the I Know First algorithm issued a forecast for WFC stock price and recommended WFC as one of the best stocks to buy. The AI-driven WFC stock prediction was successful on a 1-year time horizon resulting in more than 46.13%.

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Please note-for trading decisions use the most recent forecast.