Wells Fargo Deals with Sanctions, Growth Outlook in 2017

Augmenting credit and profits

Wells Fargo (WFC), the biggest mortgage lender in the US, is expected to post EPS (earnings per share) of $1.02 in 2Q17 and $1.07 in 3Q17 due to higher credit and improved net interest margins. The bank has seen relatively subdued growth over the past few quarters compared to its commercial banking competitors (XLF) Bank of America (BAC), Citigroup (C), and JPMorgan (JPM). Its subdued growth has mainly been due to lower wealth management and investment banking revenues.

In 1Q17, Wells Fargo posted EPS of $1—compared to estimates of $0.97. Its EPS reflects higher lending in the commercial space, partially offset by lower offtake in the retail category. From the segment’s perspective, community banking saw lower net income on a year-over-year basis—more than offset by higher net income in wholesale banking and wealth management.

Wells Fargo Deals with Sanctions, Growth Outlook in 2017

Headwinds

Wells Fargo faced headwinds in 2016 due to sanctions, investigations, and fines of $185 million by the Consumer Financial Protection Bureau for fraudulent accounts opened by employees to meet sales targets. The bank stripped CEO John Stumpf’s stock awards worth $41 million and asked him to step down. Stumpf was replaced by Tim Sloan after the scandal. The bank might face more headwinds, which could lead to higher fines and reputation loss. The bank already lost business from select corporate clients.

In 2017, Wells Fargo is expected to see some recovery in lending, deposits, and valuations. Reserve ratios could boost its payouts. We’ll study what initiatives and strategic options Wells Fargo is deploying. We can consider the bank as an investment case at the current juncture.