UBS Analyst Saul Martinez recently downgraded his rating Wells Fargo (NYSE:WFC) down from a buy rating to neutral, saying the big US bank is now trading at a premium to peers in some respects.
Under Martinez’s model, Wells Fargo now trades at 13.9 times its 2022 earnings estimates for the bank, which is higher than most of the banks it covers. Its shares are up nearly 58% year-to-date.
In the same research note, Martinez also raised Wells Fargo’s price target to $47 from $40, despite the bank trading at $46.86 per share ahead of today’s market open.
Martinez’s earnings estimates call for the bank’s total revenue to fall 2% this year and then rise 2.6% in 2022. He expects the bank to achieve a return on tangible equity capital (ROTCE) of 9.6% in 2022.
Still, Wells Fargo trades at only about 140% of tangible book value (equity less intangible assets and goodwill), which is well below comparable companies Bank of America (NYSE:BAC) and JP Morgan chase (NYSE:JPM).
The bank’s earnings are likely to remain depressed until the $1.95 trillion asset ceiling that Wells Fargo has operated under since 2018, as punishment for the false account scandal, is lifted. I expect JPMorgan and Bank of America to generate ROTCEs well above 9.6% in 2022.
But Martinez said it’s still fairly unclear when the Fed will lift the asset cap that’s cost Wells Fargo billions in profits over the years because it’s preventing the bank from expanding its balance sheet.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investment thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.