What Could Happen to Wells Fargo’s Valuation Premium in 2H17
WFC’s expected outperformance
Wells Fargo (WFC) has performed below its major banking (XLF) peers, mainly due to lower credit offtake, higher spending, and lower wealth management growth. However, due to WFC’s lower base and positioning, it is expected to garner higher growth in coming quarters than its major banking peers.
The bank’s stock has risen 1.7% over the past six months and 14.7% over the past year, reflecting marginal growth.
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In 2Q17, Wells Fargo posted net income of $5.8 billion, which was 5% higher on a YoY (year-over-year) basis, on the back of $22.2 billion in revenues. The bank saw a 6% rise in net interest income to $12.5 billion, which has driven growth in recent months.
WFC’s valuation premium to continue
Wells Fargo is now trading at a PBV (price-to-book value) multiple of 1.52x, as compared to the industry average of 1.12x. WFC’s multiple reflects a significant premium next to those of JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Goldman Sachs (GS). Berkshire Hathaway’s (BRK-B) stake in the bank, higher net interest margins, and wealth management have all helped WFC garner premium valuations.
WFC’s book value per share expanded to $36.53 in 2Q17, compared with $35.38 in the previous year and $35.70 in the previous quarter. The bank garnered a return on equity of 11.95% in 2Q17, up from 11.70% in 2Q16. The rise in its tier-1 equity ratio to 11.6% reflects improving balance sheet strength and lower nonperforming assets.
Wells Fargo’s major performance drivers in coming quarters will be credit offtake and expense management, which should generate flows in its Wealth Management division. The bank may also benefit from further diversification in its product offerings, which could help it expand business at a faster pace.