Raising EPS Ests. and TP ($65); Reiterate Outperform Rating
RECOMMENDATION
We reiterate our Outperform rating on WFC shares following its release of 4Q results that
included revenue-driven EPS and pretax pre-provision income beats. Additionally, the bank
established 2022 NII guidance that was well above expectations, while disclosing additional
expense rationalization opportunities. As such, we remain bullish on WFC shares as we believe
profitability is primed for improvement, led by loan growth acceleration, positive fee-based
revenue momentum, continued expense rationalization, progress on complying with consent
orders, sensitivity to higher interest rates, and heightened share repurchase activity.
? EPS beat. Wells reported 4Q EPS of $1.38. Excluding business sales gains, operating EPS was $1.20, which beat our estimate of $1.00 and consensus of $1.11. Relative to our estimate, the beat was driven by higher net interest income, higher fee income, and a lower average diluted share count, partially offset by a smaller negative loss provision and higher operating expenses.
? 2022 NII outlook above expectations. Management expects GAAP net interest income to increase ~3% assuming low- to mid-single-digit loan growth and a favorable balance sheet mix shift as PPP and EPBO balances run off. However, if the forward rate curve comes to fruition (three 25 bp rate hikes starting in May), management expects NII to benefit up to ~5%, bringing the total potential NII growth to ~8% in 2022.
? Incremental cost saves identified; 2022 expense outlook established. Management has identified an incremental $2.0B of potential cost savings, bringing the total potential savings from efficiency initiatives to $10.0B. Going forward, management expects the operating expense base to be down $800M to ~$51.5B in 2022 from the adjusted expense base of $52.3B in 2021, driven by $3.3B of gross expense savings, partially offset by $1.2B of incremental investments, a $0.5B increase in other spending, a $0.5B increase in wages and benefits (inflation driven), and a $0.3B increase in revenue-related expenses.
? Modeling adjustments. We are materially increasing our net interest income outlook due to an improved asset mix (better loan growth) and the inclusion of three 25-bp rate hikes into our forecasts (one in each June 2022, December 2022, and June 2023); we are increasing our loss provision forecast for the improved loan growth projections; we are reducing our noninterest income outlook for lower deposit fees driven by the bank adopting friendlier consumer deposit account policies; we are increasing our operating expense expectations as the improved revenue outlook drives incremental spending.
EPS estimates. We are raising our 2022 EPS estimate by $0.09 to $3.98 and our 2023 estimate by $0.35 to $4.70 to reflect the adjustments above.
VALUATION
WFC shares trade at 14.5x 2022E EPS, vs. JPM at 13.1x and BAC at 14.9x. WFC shares trade at only 1.59x TBV compared to 2.20x for JPM and 2.21x for BAC. Our 12-month price target of $65 (from $58) assumes WFC shares trade at 13.8x 2023E EPS, which is justified by Wells’ better EPS growth prospects (superior asset sensitivity and efficiency opportunities).