Wells is attempting to get better control of expenses

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Wells is attempting to get better control of expenses, and has noted that the efficiency ratio (noninterest expenses to revenues) is currently too high. The company is targeting efficiency initiatives to lower expenses by $2 billion annually by the end of 2018, and plans to reinvest the savings in the business. It looks for an additional $2 billion in annual expense reductions by the end of 2019, which are expected to flow directly to earnings. Management guided toward a 19% effective tax rate in 2018, down from a high-20% rate in 2017, due to the recently passed Tax Cuts and Jobs Act. To reflect the asset cap at 2017 year-end levels, as well as expected additional customer fallout, we are lowering our 2018 EPS estimate to $4.88 from $5.00. We are also lowering our 2019 EPS forecast to $5.39 from $5.50. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Wells Fargo is High. At December 31, 2017, Wells Fargo estimated that its Tier 1 common ratio was 11.9% under Basel III (advanced approach, fully phased-in). In June 2017, the Fed did not object to the company’s 2017 capital plan, which included an increase in the common stock dividend from $0.38 to $0.39 per share as of 3Q17, and the repurchase of up to $11.5 billion of common stock. The stock’s yield under the new dividend is about 2.5%, below the 3.5%-4.0% range prior to the financial crisis. Our dividend estimates are $1.68 for 2018 and $1.84 for 2019. In 4Q17, the company repurchased 51.4 million shares of its common stock. We look for a 3% decline in the average share count in 2018. MANAGEMENT & RISKS The new CEO of Wells Fargo is Tim Sloan, formerly the company’s president and COO. Mr. Sloan replaces John G. Stumpf, who resigned in October 2016 following revelations of fraudulent sales practices at the retail bank. Mr. Sloan is a 29- year veteran of Wells Fargo, having spent much of his career in wholesale and commercial banking.
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M ARKET U PDATE - 8 - While Wells Fargo is a diversified financial services company, its focus on the low-margin mortgage business is a concern. Wells Fargo views the mortgage as the gateway to a broader consumer relationship, and its earnings growth strategy has always been focused on revenue growth, driven in part by cross-selling, or selling multiple products to each customer. However, these sales practices have been sharply curtailed in the wake of a 2016 scandal. There is also the risk that demand for WFC products may slow – at least on the consumer side. In addition, Wells Fargo focuses exclusively on the U.S. – a mature and intensely competitive market. Wells Fargo is primarily a retail and commercial banking and consumer finance firm. While the company has added to its trust and investment management business in recent years via internal growth and acquisitions, market-sensitive revenues have remained a relatively small part of the company’s mix. In general, we favor financial institutions that are more heavily linked to fee revenues than to spread revenues.
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