Wells Fargo is earning some bulls ahead of its earnings report on Friday.
The San Francisco-based bank has yet to fully recover from the fallout of its fake-accounts scandal, which emerged in late 2016. Wells Fargo (ticker: WFC) also fared worse than its peers in 2020, with shares falling 44% while the KBW Bank Index saw a 5.5% drop. But that underperformance is a big part of the reason why analysts have been warming up to the bank.
Although sentiment on banks has increasingly become more bullish over the past two months, analysts still caution that the sector’s performance will in large part be dependent on the path of the economic recovery from the coronavirus pandemic. Economic data hasn’t been as bad as initially feared, but it has been uneven. With all banks grappling with the same set of issues—low interest rates and an uncertain economic outlook—Wells Fargo is one of the few that has other opportunities for growth and outperformance. In fact, it is the only of the large banks, outside of Citigroup (C), that still trades below tangible book value.
Analysts at UBS Securities now rate Wells Fargo a Buy, lifting their price target on shares to $41 from $23.
One of the biggest opportunities for the bank is to lower its costs. Over the summer, CEO Charlie Scharf noted that the bank has a bloated management structure and that it pays too much for third-party consultants. Reducing these costs could improve the bank’s efficiency ratio. As of Sept. 30, Wells Fargo’s it stood at 78.7% while peers such as JPMorgan Chase (JPM) and Bank of America (BAC) stood at 56% and 63.1%, respectively, UBS analyst Saul Martinez noted.
“The upshot of low profitability is that incrementally higher revenue and lower costs have outsized percentage point impacts on earnings,” Martinez wrote, estimating that each 1% reduction in the bank’s 2022 efficiency ratio could boost pretax earnings by 3.8%.
He increased his 2021 earnings prediction by 16.7% to $2.24 per share and 2022’s forecast by 21.7% to $3.65.
Wells Fargo shares were up 3.5%, at $34.40, in recent trading, outpacing the S&P 500, which was up 0.2%.
Write to Carleton English at [email protected]
