Wells Fargo's (WFC:US) shares represent one of the best international banking sector plays on the resurgent American economy as well as offering one of the highest forecast yield of any US bank. As with its peers, Wells Fargo, - the largest US bank by market value - was hit hard by 2008's financial crisis. Indeed, in October 2008 it took $25bn (£16.3bn) in US government bailout funds after regulators discovered it was potentially facing a huge capital shortfall should economic conditions worsen. But Wells' recovery from that low point has been swift and, by December 2009, it had repaid that emergency funding in full.
- Solid growth forecast
- US economic recovery gathering pace
- Decent credit quality
- Tiny eurozone exposure
- Litigation risk
- Shares not cheap for the sector
Wells' first-quarter figures last month revealed further evidence of recovery. Credit quality has continued to improve strongly and the bank's non-performing assets have fallen by $3.8bn since 2012's first quarter to $22.9bn - tiny compared with Wells' $800bn loan book. Moreover, the lender looks reasonably well capitalised and reported a tier-one capital ratio of 10.38 per cent at the end of March - not as robust as, say, Citigroup's (C:US) 11.8 per cent ratio, but better than JPMorgan Chase's (JPM:US) 10.1 per cent ratio.
Compared to such core US rivals, Wells also looks focused on less risky areas. It's America's largest mortgage lender, for example, and has largely avoided volatile investment banking. Income from Wells' investment banking business reached just $353m in 2013's first quarter, compared with group total income of $22.4bn. Its exposure to the eurozone is tiny, too - total eurozone exposure reached just $10.5bn at end of last year and a mere $2bn of that is on loan in the eurozone's more troubled nations. In contrast, Barclays' (BARC) exposure to the eurozone's weakest members stands at a hefty £59.4bn.
Being a largely US play is especially good news given the improving state of the US economy. According to the IMF, the US economy should grow 1.9 per cent during 2013 and by 3 per cent in 2014. That economic growth profile also looks fairly secure after US policy interventions largely removed the threat of a sharp contraction from a plunge off the so-called 'fiscal cliff'. Exposure to that solid growth backdrop is great news for credit quality, credit demand and earnings - in fact, JPMorgan Cazenove expects Wells' earnings to grow 9 per cent in 2013, and 7 per cent in 2014. That's in sharp contrast to the economic prospects facing banks in Europe given that the IMF expects the eurozone's economy to contract by 0.3 per cent in 2013.
WELLS FARGO (WFC: US) | ||||
|---|---|---|---|---|
| ORD PRICE: | $39.3 | MARKET VALUE: | $208bn | |
| TOUCH: | $38.7-$39.8 | 12-MONTH HIGH: | $39.7 | LOW: $29.8 |
| DIVIDEND YIELD: | 2.9% | PE RATIO: | 11 | |
| NET ASSET VALUE: | $30.6 | |||
| Year to 31 Dec | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|
| 2009 | 18.0 | 176 | 49.0 |
| 2010 | 19.0 | 223 | 20.0 |
| 2011 | 23.7 | 285 | 48.0 |
| 2012 | 28.5 | 340 | 88.0 |
| 2013* | 31.2 | 370 | 115 |
| % change | +9 | +9 | +31 |
*JPMorgan Cazenove estimates Normal market size: na Matched bargain trading Beta:1.23 £1=$1.53 | |||
A prospective dividend of nearly 3 per cent, based on JPMorgan Cazenove's estimates, isn't bad either and, based on Bloomberg consensus forecasts, it is the highest-yielding stock in its US peer group. True, 3 per cent is nothing special for its international peers - HSBC's (HSBA) shares, for instance, offer a prospective yield of over 4 per cent. But it's excellent for a US bank - a sector which has traditionally paid modest dividends. For example, Bank of America's (BAC:US) shares offer prospective yield of just 0.3 per cent, Morgan Stanley's (MS:US) offer 0.8 per cent and Goldman Sachs' (GS:US) prospective yield is 1.3 per cent. Wells' dividend payout is also forecast to grow rapidly - by 31 per cent in 2013, according to JPMorgan Cazenove, and 12 per cent in 2014.
Still, Wells - like its big US banking peers - does face challenges from past business conduct issues and legal challenges. For example, last year the top five US banks were forced by various US state attorneys and government agencies to sign up to a $25bn settlement to compensate homeowners hit by apparently improper foreclosure procedures. Wells' contribution came in at a painful $5.3bn. Moreover, legal challenges in recent years arising from other mortgage-related issues have also proven expensive for US banks - such as mis-selling claims from institutions that bought mortgage-backed bonds issued by US banks. Bank of America has the biggest bill from mortgage-related settlements, having paid out about $42bn in the past three years. But Wells comes next, with $8.3bn in settlements, and further pain can't be ruled out.
