What to Expect from Wells Fargo in 2H17 in the Wake of Scam

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Part 7
What to Expect from Wells Fargo in 2H17 in the Wake of Scam PART 7 OF 10

Why Wells Fargo’s Valuation Premium Is Fading in 2017

Stock outperformance

Wells Fargo (WFC) has underperformed its major banking (XLF) peers due to lower credit offtake, higher spending, and subdued wealth management, partially offset by trading revenues. The bank is expected to see continued slower growth in commercial and consumer lending in 2H17. This combined with a marginal uptick in trading and inflows for asset management will likely result in lower earnings sequentially.

The bank’s stock has fallen 14.9% over the past six months and 0.9% over the past year, reflecting investor concerns about the bank’s scams and controversies.

Why Wells Fargo&#8217;s Valuation Premium Is Fading in 2017

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In 2Q17, Wells Fargo managed net income of $5.8 billion, 5% higher from 2Q16 on the back of $22.2 billion in revenues. The bank managed 6% growth in net interest income to $12.5 billion driven by a rise in rates.

Valuation premium fading

Wells Fargo is now trading at a PBV (price-to-book value) multiple of 1.37x as compared to the industry average of 1.07x. The bank’s valuation premium has been declining mainly due to a weaker operating performance. Its closest peer in terms of valuation, JPMorgan (JPM), is trading at 1.36x. Bank of America (BAC) and Citigroup (C) are trading below their book values.

WFC’s book value per share grew marginally to $36.53 in 2Q17 compared with $35.38 in the previous year. The bank has maintained return ratios. However, it has seen a marginal decline in efficiency ratios. Wells Fargo can target regional diversification and more offerings for Asian markets in a bid to expand its business.


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