When Wells fargo (WFC) released first-quarter results that exceeded expectations (although on a non-GAAP basis), its revenues also decreased 18% year-over-year. The quarter included only a partial foreclosure that has become widespread in the United States. WFC stock likely to test again the lows of $ 26 reached earlier this month? If the bank maintains its dividend and does not require a new loan reserve in 2020, the stock could stop falling from current levels.
Wells Fargo has a trillion dollar debt. The Fed limited its ability to lend and limited its balance sheet to $ 1.95 trillion. Indeed, investors should note that the average total loan yield has declined steadily over the past five quarters:
Source: Wells Fargo
Wells Fargo identified a decline in loan yields and put pressure on margins in 2018 when she blamed unfavorable changes in loan composition. As the economy deteriorates, expect more pressure on the auto and mortgage segments of the bank’s business.
In the first quarter, the bank made a provision of $ 4 billion to cover credit losses. It’s as follows:
- $ 2.9 billion in loan reserves
- $ 909 million net charge for loans
- $ 172 million in provisions for debt securities
Source: Wells Fargo
It recognized a charge of $ 950 million on the impairment of securities and $ 621 million of net losses related to the investment results of the deferred compensation plan.
In total, this translated into GAAP earnings per share of one cent, missing expectations of 52 cents.
Pressure on the loan portfolio
The bank’s oil and gas loan portfolio is worth $ 14.3 billion. Falling oil prices can lead to default.
Likewise, in the retail trade, restaurants are particularly at risk of tracking loan payments. But if the United States selectively reopens businesses and includes restaurants, the bank may not need to enforce its $ 5.8 billion restaurant loan provisions.
Source: Wells Fargo T1 earnings call presentation
Wells Fargo has $ 16.2 billion in loans in entertainment and leisure. He noted that his exposure to cruise lines is less than 1% of outstanding loans. Yet businesses in the games of chance (17%) and sporting goods, boats and recreational vehicles industries need to keep their cash flow to avoid failures.
CRE’s $ 122.8 billion mortgage loans are the bank’s primary liability. However, businesses will still have to maintain their presence in office buildings. Once again, as the spread of coronavirus in the United States declines sharply and companies reopen, Wells Fargo will not need to cancel much of its office building loans.
Wells Fargo’s deposits increased 6% year over year to $ 1.3 trillion in the first quarter. Its average filing cost fell 52 basis points to 0.52%. This is the result of a deposit campaign launched in early 2019. Going forward, if customers slow down their mortgage payments and withdraw funds to pay their bills, the deposit balance could fall in the next quarter.
Expect strong customer loyalty, as the bank has offered fee waivers and deferred payments to more than 1.3 million of its consumers and small business owners. By waiving fees worth $ 30 million, her customers will appreciate her help. In addition, Wells Fargo has scheduled a minimum hourly wage increase ranging from $ 15 to $ 20. Although this salary increase will take effect by the end of the year, satisfied staff will provide better service to customers.
Not a moment 2008
At the conference call, Wells Fargo thought the financial crisis was much worse for, for example, his auto portfolio. CFO John Shrewsberry said, “And so, if things go a lot worse, there is certainly the possibility that we will end up building more or finding more loads or both, but we are satisfied the approach we adopted in March to develop our scenarios with our governance around it and the approach of the end of the quarter. ”
The bank also modeled a comprehensive capital analysis and review that did not include stimuli. In this scenario, he predicts a “peak quarterly loss rate expressed on an annualized basis of approximately 1.7%, 1.75% and an average of approximately 1.2%”.
While it is difficult to predict future unemployment and GDP, the bank has a stronger portfolio than it did during the last crisis. Ultimately, the risk to his business depends on the length of the closure.
Assessment and your take-out
Stock Rover fixes the WFC shares at a fair value of $ 45.26. That’s not far from the analysts’s consensus price target of $ 41.73 on average. In reality, the value of the stock depends on the length of the outage and the ability of the United States to contain the spread of the coronavirus. So, as restrictions relax in the coming weeks, the WFC stock may tend to increase. The improved sentiment will outweigh fears of further loss of profits or higher provisions.
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Disclosure: I / we have no position in the stocks mentioned, but I can initiate a long position on WFC within the next 72 hours. I wrote this article myself and it expresses my own opinions. I do not receive any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose actions are mentioned in this article.