Negative headlines didn’t stop the bank from growing deposits and maintaining pricing discipline over the last year.
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Wide-moat Wells Fargo
managed to grow deposit balances by 5% over the past 12 months to $1.3 trillion and was able to maintain deposit pricing discipline despite negative headlines over the bulk of the past year. The mix of interest-bearing and non-interest-bearing deposits did not materially change, and the cost of funding the bank’s balance sheet rose by only 4 basis points over the past 12 months in a rising interest-rate environment.
Jim Sinegal is a senior equity analyst for Morningstar.
According to the company's disclosures, customers' satisfaction ratings for branch visits are actually up slightly from the second quarter of 2016—before the company’s sales misbehavior was widely publicized—and loyalty ratings continue to rebound. We think these metrics are evidence that the company’s low-cost funding base—and its wide moat—are intact, and that operational improvements should contribute to outstanding returns over time. Indeed, the bank generated an above-average 1.21% return on assets during a difficult quarter. We are maintaining our fair value estimate.
Management is planning to reduce expenses by $2 billion over the next 18 months, with essentially all of the cost savings adding to earnings. If successful, in combination with lower corporate tax rates and the company’s planned repurchase, these efforts could generate more than $0.30 per share in incremental earnings per share. Management’s specific plans around branch and facilities optimization could account for $320 million of savings, and we see no reason why the firm cannot reduce spending on consulting and other services in future years—both a lighter regulatory environment and the resolution of cross-selling issues should contribute to a lower expense burden. These initiatives alone could account for a quarter of targeted expense reductions. We also note that growth in compensation and third-party services accounted for the bulk of the bank’s year-over-year increase in expenses.
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