Credit Suisse has update its earnings model of Wells Fargo & Co (NYSE:WFC) to reflect changing macro assumptions--- slower loan growth (through the first half of 2017), more favorable commercial credit quality trends, and higher interest rates (the likelihood that Credit Suisse's banks benefit from at least two rate hikes in 2017). Incorporating these changes, the firm is raising its full year 2017 estimate, to $4.20 from $4.15 per share. Carrying through the assumed benefit of additional U.S. interest rate hikes, with reasonably conservative deposit beta assumptions, the firm's 2018E increases to $4.55 from $4.45 per share. Factoring in these estimate changes, Credit Suisse's target price increases to $58 from $56.
Credit Suisse arrive at its $58 target price for WFC using a weighted average of the firm's blue sky scenario (25% weight; $64 target price applying 2.0x to its blue sky scenario year end 2017E tangible book value), downside scenario (10% weight; $43 target price applying 1.4x to Credit Suisse's downside scenario 2017E tangible book value), and base case discounted cash flow analysis (65% weight; $58 target price applying a 10% cost of capital and 3% terminal growth rate). Risks to achievement of this target price are largely tied to earnings, the macro outlook, and Wells Fargo's ability to successfully resolve sales practice issues.
Share price outperformance relies on both confidence in sustainable growth and ROE prospects (a more favorable macro backdrop should help), and conclusion/resolution of the inquiries and investigations into the bank's sales practices. Credit Suisse is confident in the positioning and longer term prospects for the Wells Fargo franchise, but on the sidelines for now based on relative risks, returns and valuation.
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