Credit: Shutterstock photoWells Fargo ( NYSE:WFC ) is quite a popular stock among many fund managers, with Warren Buffet as the largest guru shareholder. According to GuruFocus data, Wells Fargo makes up 24.16% of Buffett's portfolio. Wells Fargo, the largest mortgage lender in U.S., reported its Q3 numbers on Oct. 14, with higher than estimated earnings in such a robust macro environment. The stock has dropped by 3.54% year to date.
Company overview:
Wells Fargo is a $270.4 billion market cap company. Recently, the bank reported an EPS of $1.05, beating the consensus estimate of $1.04. Its revenue rose to $21.9 billion, which is higher by 3% over the same period last year.
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Wells Fargo is the fourth largest bank in the U.S. by assets and the second largest in terms of deposits, home mortgage servicing and debit cards. The bank operates under three different segments:
- Community Banking
- Wholesale Banking
- Wealth and Investment Management.
Potential catalyst on the basis of recent earnings:
1)Improvement in profitability and efficiency ratio
A key element gripping the U.S. banking sector is the near zero interest rate environment that's acting as an impediment on banks' earnings. The return on assets and interest-based income of U.S. banks are lower. In order to increase profitability, banks are focusing more on reducing their expenses by implementing cost cutting programs.
2)Community banking
The largest contributor to Wells Fargo's total revenue is the community banking segment. The segment consists of consumer loan, student loan, small business lending, etc. In Q3-15 the segment reported revenue of $13.6 billion, increasing 7% year over year, with net income of $3.7 billion.
Key metrics:
Auto lending improved by 10% year over year to $8.3 billion. WFC mortgage originations were $55 billion, down from $62 billion in the year-ago quarter, and its credit card penetration rose to 42.9% from 39.7% in the year-ago quarter. Overall, operating metrics of the Community Banking segment improved this quarter.
3)Wealth and investment management
The segment's services include financial planning, private banking, credit, investment management, fiduciary services and retirement services.
Key metrics:
Wells Fargo client assets were down 4% to $1.4 trillion, and AUM was down at $409 billion. Its retirement assets were down over 5% to $330 billion.
4)Wholesale banking
This segment provides services to businesses around the globe. The third quarter net income of $1.8 billion was down 8% year over year, while non-interest expenses were higher by 1% due to higher staff costs. Provisions for credit losses increased by $130 million compared to last year.
Key metrics:
Loans in the Wholesale Banking segment increased 15% compared to the year-ago quarter, while treasury management revenue increased 9%.
Wall Street expectation
The stock's consensus price target is $60. Among the 34 analysts who cover Wells Fargo, 16 have assigned buy ratings, three assigned the sell rating and 11 have assigned a hold rating.
Relative valuation
As per the below chart, WFC shares trade at a P/B of 1.58x, while the average multiple for bank is trading at 1.16x. In addition to this, GuruFocus recently reported the P/B is currently trading at close to the two-year low.
Guru holdings
With 4.7 billion shares in his portfolio, Warren Buffet is Wells Fargo's leading guru shareholder. Other guru holders include James Barrow ( Trades , Portfolio ), Ken Fisher (Trades, Portfolio), and Yacktman Fund (Trades, Portfolio).
Note:
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This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
