Compass Point Sees Potential Increase in Provision Expenses for Wells Fargo (WFC) - Cuts PT to $54
Compass Point maintained a Neutral rating on Wells Fargo (NYSE: WFC), and cut the price target to $54.00 (from $55.00), following the company's 4Q earnings. WFC reported EPS of $1.03, which was above the consensus estimate of $1.02. The price target reduction comes as Compass Point increases it's outlook for provision expense. WFC saw an uptick in credit related costs due to an increase in oil & gas related charge-offs during 4Q, while management warned of the potential for further credit losses in 2016.
Analyst Jesus Bueno commented, "We maintain our Neutral rating and reduce our price target to $54 from $55 following the release of 4Q earnings. Our price target reduction comes as we increase our outlook for provision expense, and incorporate a 45 bps normalized provision expense into our valuation methodology. WFC saw an uptick in credit related costs due to an increase in oil & gas related charge-offs during 4Q, while management warned of the potential for further credit losses in 2016. While we estimate the acquisitions of GE Capital assets will be accretive in 2016, WFC now faces a headwind from higher credit costs while no longer benefiting from reserve releases. 3Q15 marked the first quarter in years in which no reserves were released, a once 1-7% EPS quarterly benefit. We expect WFC will also see lower Y/Y revenue from mortgage banking with originations expected to decline to $1.4T from $1.6T in 2015. Further market volatility could also threaten WFC's other non-interest income business lines, such as asset management, investment banking, trading, and equity gains. We are raising our 2016 EPS estimate to $4.30 from $4.27 to account for the December rate increase, and introduce our 2017 EPS estimate of $4.45. We remain below consensus for both 2016 and 2017 as we do not assume higher rates in our models."
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Shares of Wells Fargo closed at $48.82 yesterday.