) is a diversified financial services company headquartered in San
Francisco. It is the fourth largest bank in the U.S. by assets and
the second largest bank by market cap. It is also the second
largest bank in deposits, home mortgage servicing, and debit cards
in the United States. Wells Fargo's competitors include banks such
as Bank of America (
), Goldman Sachs (
), JP Morgan (
), Citigroup (
) and UBS (UBS).
We estimate that the mortgage business is the largest
contributor of value to Wells Fargo, accounting for 28% of our
price estimate for the company's stock. Other divisions
contributing significantly to Wells Fargo's value include asset
management & brokerage and securities & trading, each
making up about 19% of the company's equity value.
See our full analysis and $33.81 price estimate
for Wells Fargo
Rising Non-Interest Expenses
During its Q4 2010 earnings call in mid-January, Wells Fargo
highlighted an emphasis on "reducing expenses, being more efficient
and nimble" and "limiting the impact of regulatory reform costs on
We recently discussed the improvement in Wells Fargo's loan
portfolio observed during Q4 2010, which was driven in part by
strong loan demand and decreased net charge-offs. Net charge-offs
declined to 2.02% of average loans in the fourth quarter,
considerably lower than the 2.71% observed a year earlier and the
2.14% seen in Q3 2010.
Despite optimism following strong top line growth and a decline
in net charge-offs during Q4 2010, we believe that non-interest
expenses still pose a concern for Wells Fargo's outlook. In 2010,
Wells Fargo's non-interest expense as a percentage of total
revenues increased to 59.2% (up 4.4% from a year earlier), driven
by increases to salaries, compensation & incentive expenses,
foreclosed assets expenses and operating losses.
We currently estimate that Wells Fargo's non-interest expense
will remain at these current high levels going forward. However, a
decline in non-interest expenses as a percentage of revenues back
to 2009 levels would imply roughly 13% upside to our
price estimate for Wells Fargo stock. Below are a some factors that
could contribute towards lower non-interest expense for Wells
1. Salary Cost Reductions
With cost reduction a high priority, Wells Fargo is planning to
take measures that could result in employee terminations. While the
size of the potential layoffs is unclear, the reduction in salary
and incentive-based expenses, currently more than 40% of the
company's non-interest expenses, could present upside.
2. Fewer Merger-Related & Other Expenses Going
While Wells Fargo will witness fewer merger-related expenses
going forward, it will enjoy cost saving arising from merger
synergies. Also, costs like foreclosed asset expenses are likely to
decline significantly in the future as economic conditions improve.
These developments should pave the way for a reduction in
non-interest expenses as a percentage of revenues.