Wells Fargo & Co. 31 January Copyright PSG

Transcription

1 Wells Fargo & Co 31 January 2018

2 Contents 1. Recommendation 2. Nature of business 3. Financial review 4. Divisional review 5. Capital and Liquidity 6. Company guidance 7. Portfolio guidance 2

3 1 Recommendation 3

4 Recommended exposure up to 5%: 4 We expect some improvement in the group s ROE, which is currently in the lower end of its 11% to 14% target range Adjusted overhead ratio of 61.9% for the 2017 financial year, missing management s previous guidance of 60% to 61% Improvement in costs is essential to drive profitability against the slowdown in loans growth Communicated that the group has taken a more conservative credit stance in certain markets - Contributor to the decline in loan growth Second half of the year continued to see large litigation expenses Group has been successful in retaining clients despite the scandal - will likely continue to weigh on investor confidence Tax reforms will both have a direct positive impact on earnings - Additional earnings from the tax reforms will be consumed by increasing the minimum hourly wage for employees and increase donations to 2% of after tax profits We believe the share offers value trading at 1.7 times its NAV - Justified by the group s above-average ROE Premium that the group trades to its peers is also below its long-term average Share offers a forward dividend yield of 2.6% The results are discussed on a quarterly year-on-year basis by comparing the fourth quarter of 2017 to the fourth quarter of 2016.

5 2 Nature of Business 5

6 Nature of business Wells Fargo & Company is an American international banking and financial services holding company headquartered in San Francisco, California, with "hub quarters" throughout the country. It is the world's second-largest bank by market capitalization and the third largest bank in the U.S. by assets. 6

7 3 Financial Review 7

8 Financial Review: 8 Net interest income, including a once-off adjustment, was flat at $12.3bn - Average loans increased by 1% to $951.8bn - Net interest margin reduced slightly to 2.84% (2016: 2.87%) - Average deposits increased by 2%, supported by initiatives to attract retail deposits - Credit provisions dropped to $651m from $805m in comparable quarter - Net charge-off rate improved from 0.37% to 0.31% - Non-performing loans as a percentage of total loans improved to 0.84% from 1.07% at the end of December 2016 Non-interest revenue (NIR) increased by 6% to $9.7bn - Fees and commissions increased by 3% while service charges decreased 8%. Gain from equity investments increased 43%. Expenses increased by 27% to $16.8bn Higher overhead ratio of 76.2% (2016: 61.2%) - overhead ratio included a 14.74% impact from the $3.3bn litigation accrual The results are discussed on a quarterly year-on-year basis by comparing the fourth quarter of 2017 to the fourth quarter of 2016.

9 Financial Review cont: 9 Profit before tax ended 39% lower at $4.6bn Negative income tax of $1.6bn (2016: $2.3bn positive) due the impact of the Tax Act, the sale of WFIS and litigation accruals 18% increase in earnings Diluted EPS increased by 21% to 116 US cents Full year adjusted diluted EPS came in at 398 US cents from 399 US cents in the prior year Group reported an ROE of 12.5%, improvement from 10.9% in the comparable quarter Full year reported ROE came in at 11.4% (2016: 11.49%) Dividends for the full year totalled 154 US cents compared to US cents in 2016 Book value per share increased by 6% to 3744 US cents The results are discussed on a quarterly year-on-year basis by comparing the fourth quarter of 2017 to the fourth quarter of 2016.

10 4 Divisions 10

11 Community Banking: (Contributed 57% to net income) Net interest income of $7.5bn was maintained - Aided by a higher loan yield of 5.10% (2016: 5.01%) - Average loans declined by 3% - Branch and ATM interactions were 5% lower - Digital interactions reflected an 8% increase - Provision for credit losses increased by 1% to $636m driven by seasoning in the card portfolio - Non-interest revenue strengthened by 9% Operating expenses rose by 46% to $10.2bn due to the litigation expenses Net income increased significantly by 34% to $3.7bn 11 The results are discussed on a quarterly year-on-year basis by comparing the fourth quarter of 2017 to the fourth quarter of 2016.

12 Wholesale: (Contributed 33% net income) 12 Net interest income decreased by 3% to $4.2bn - Average loans were maintained at $463.5bn - Loan yield of 3.68% was up from 3.45% in the comparable quarter - Average deposits increased by 1% to $466bn - Credit provisions were $20m (2016: $168m) NIR rose by 2% to $2.9bn - Aided by $848m gain on the sale of Wells Fargo Insurance Services USA and higher commercial real estate brokerage fees - Contained by a $414m in impairments in low-income housing and tax-advantaged renewable energy investments due to the Tax Act - Impacted by lower market sensitive revenue. Expenses were 5% higher at $4.2bn Net income decreasing by 2% to $2.1bn The results are discussed on a quarterly year-on-year basis by comparing the fourth quarter of 2017 to the fourth quarter of 2016.

13 Wealth & Investment Management: (Contributed 10% to net income) Non-interest revenue increased by 5% to $3.2bn - Supported by an 11% increase in client assets to $1.9tn - Assets under management edged 5% higher to $504bn Net interest income increased by 7% to $1.1bn - Driven by higher rates and balance sheet growth - Average loans up 4% while deposits were down 5% Expenses increased 7% to $202m Net income increased by 1% to $659m. 13 The results are discussed on a quarterly year-on-year basis by comparing the fourth quarter of 2017 to the fourth quarter of 2016.

14 5 Capital and Liquidity 14

15 Capital and Liquidity: CET1 capital ratio was estimated at 11.9% in 4Q17 is well above the target of 10% At half year, the company was approved by the US Federal Reserve for the group s capital return plans to repurchase shares up to $11.5bn for the four-quarter period 3Q17-2Q18 For the full year net share repurchases amounted to $6.8bn The group is compliant with the liquidity requirements 15

16 6 Company Guidance 16

17 Company Guidance 17 Management is targeting $4bn in expense reductions - Efficiency initiatives will decrease expenses by $2bn annually by year-end The remaining expense reductions are expected to be realised by the end of 2019 and should be reflected in the bottom line in full year total expenses are anticipated to be in the range of $53.5bn to $54.5bn - Done by property optimisation, branch rationalisation and lowering professional service expense contract rates The effective tax rate for full year 2018 is anticipated to be approximately 19% In automobile lending, a sustained decrease in outstanding loans is expected through late 2018 Effective from March 2018, the minimum hourly pay is to be upwardly revised for U.S.-based team members to $15.00, an 11% increase $400m has been set aside for donations in 2018, while from 2019 and beyond management plans to donate 2% of after-tax profits Medium-term guidance provided - ROE between 11% and 14% - Overhead ratio between 55% and 59% - Net payout ratio between 55% and 75%

18 7 Portfolio Guidance 18

19 Portfolio Guidance We believe the share offers value at current levels Recommend an overweight position Recommended exposure of up to 5% 19

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