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Wells Fargo Benefits From Loan Growth, Legal Issues Linger

Zacks Equity Research

On Aug 28, we issued an updated research report on Wells Fargo & Company WFC. Despite surging expenses and pending legal issues, the bank’s strong balance sheet position and expansion moves through the implementation of various strategies seem impressive.

Notably, the company has been able to gain analysts’ confidence over the past 30 days. Its earnings estimates for the current year have been revised 1.3% upward to $4.80. It carries a Zacks Rank #3 (Hold), at present.

The stock has lost 1.4% so far this year against 5.5% growth recorded by the industry.

Wells Fargo’s balance sheet growth story remains impressive as both loans and deposits loans recorded five-year CAGR (2014-2018) of nearly 2.5%. Furthermore, with support from the improving economy these balances are likely to rise.

The company plans to expand its operations in international markets and augment its asset management business. It has demonstrated its ability to assimilate local franchises, offering a wider range of products than the acquired company could have, thus increasing the number of options for customers. This has been the driving force behind its growth in the recent years.

Further, improving economic conditions has enabled the bank to target higher ranges for profitability metrics. Notably, Wells Fargo’s return on assets was 1.31% and average return on equity was 13.26% as of Jun 30, 2019. We believe its solid fundamentals will help achieve the targets (return on equity to be 12-15% by 2020-end) over time.

However, involvement in several legal issues and a cap placed on the assets position by the Federal Reserve hurt the bank’s growth. Also, with the ongoing review process of business practices, more wrongdoings may be revealed, increasing negative impact on the company’s top line and result in reputational headwinds.

Wells Fargo has also been experiencing challenges to control costs for the past few years. Though the company remains focused on expense management with costs estimated to be in the $52-$53 billion range for 2019, we believe legal expenses related to pending litigation issues will keep hurting its bottom line.

Stocks to Consider

First Horizon National Corporation FHN has been witnessing upward estimate revisions for the past 30 days. Year to date, the company’s share price has been up 17.8%. It currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

First Business Financial Services, Inc. FBIZ has been witnessing upward estimate revisions for the past 30 days. Additionally, the stock has climbed nearly 15.2% year to date. It carries a Zacks Rank #2, at present.

Mackinac Financial Corporation MFNC has been witnessing upward estimate revisions for the past 30 days. Also, this Zacks #2 Ranked company’s shares have risen nearly 2.6% year to date.

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