Wide-moat Wells Fargo WFC reported OK third-quarter results. The bank reported a $1.6 billion legal charge in the quarter. While we didn't necessarily know the exact amount, given movements in legal reserve estimates last quarter, we had predicted that several outsize legal charges were likely on their way, which is exactly what is happening. We would not be surprised if the bank has one or several more of these charges left. On the positive side, the bank stuck to its updated net interest income guidance of negative 6% for the year. The bank also stuck to its expense guidance of hitting the upper end of its $52 billion-$53 billion range. We'll note that this is adjusted for excess operating losses and deferred compensation expenses, therefore the GAAP expense amount will come in above this range. However, this was still a good sign, as the bank had been forced to increase its expense guidance in the past due to ballooning risk and compliance related spending. This may indicate that the bank has a better grasp of the true cost of what it will take to reform and rebuild its internal systems. After making several adjustments to our projections, including giving the bank slightly less credit for net interest margin expansion in the future, we are lowering our fair value estimate to $57 per share from $58.
With Wells having found its next CEO (Scharf will start on Oct. 21), the asset cap will be the next big obstacle for Wells. We currently predict it will stay on until sometime in 2021. Management commented on the cap during the earnings call and said it is having a minimal impact on profitability, and that they still have room to maneuver, even while growing core loans and deposits.
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