The reopening trade has been a big theme in recent months as more people have gotten vaccinated and are returning to normal life. Many companies have benefited greatly from this, namely restaurants and retailers. Banks have been running hot too, but one analyst thinks the frontrunner, Wells Fargo & Co. (NYSE: WFC), may be cooling off.
The four major banks, Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo have seen the biggest benefit from the reopening trade. The S&P 500 and Dow Jones industrial average are up about 10% and 11% year to date, respectively. Bank of America is up 39%, Citigroup is up 24%, JPMorgan is up 27% and Wells Fargo is up 55%.
Considering this massive run over the past few months, UBS believes that it is time to take some off the table for Wells Fargo. As a result, the firm downgraded Wells Fargo to Neutral from Buy, though it raised its price target from $40 to $47, very near the most recent closing price of $46.86.
Currently, Wells Fargo trades at 13.9 times 2022 estimated earnings, a premium to most banks UBS covers. Withstanding this, ample room exists for profitability to expand from current levels, and UBS still forecasts return on average tangible common shareholders equity (ROTCE) remains below those of peers beyond 2022.
UBS also thinks considerable uncertainty remains about the timing of a potential asset cap removal. ROTCE expansion occurs, but profitability stays below those of peers. The firm forecasts an above consensus 2022 ROTCE of 10.5%. However, UBS thinks core profitability should be assessed using net charge-offs as a proxy for loan losses. On this basis, 2022 ROTCE is forecast at only 9.6%. The firm expects core profitability to expand materially from this level beyond 2022 on modest revenue growth, continued expense reductions and capital returns well in excess of 100% earnings. Even then, 2024 ROTCE rises to about 12%, still well below the average of 15.1% at other banks in the coverage universe.
The firm further detailed in the report:
Our forecasts do not explicitly incorporate Fed Fund hikes beyond 2022, which would admittedly benefit net interest income (NII) at Wells, though other banks would also see a revenue boost and our 2021-2022 revenue estimates stand well above consensus. Still modest revenue growth as interest rates begin to rise… Benefits from higher rates are expected to be partly offset by limited loan growth and lower mortgage income.
Wells Fargo stock traded down about 3% to $45.47 on Wednesday, in a 52-week range of $20.76 to $48.13. The consensus price target is $47.95.
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