Despite the recent rally in bank stocks, we believe that the market has yet to price
in the full upside from tax reform, capital returns and higher rates. Our new
analysis implies that in a blue sky scenario, which incorporates a 21% tax rate,
four rate hikes through 2019 and a step-up in capital returns, money center/super
regionals should be able to generate 17%/22% ROTCE (up from 12% in 2017E),
implying 28% price upside.We expect blue sky to occur in the long term, with 2019
money center/super regionals ROTCE of 14%/17%, and 7% price upside over NTM.
Following our analysis, we are adding shares of Buy-rated WFC to the Americas
Conviction List (CL) on our view that WFC has the most to gain in a blue sky earnings scenario. The company is set to deliver operating leverage starting in 2018, which should translate into much higher earnings growth in 2019 vs. FactSet consensus. Our analysis highlights that market expectations for both NII and expense savings are overly conservative. We are 10% ahead of 2019 consensus earnings (ex. tax reform) and we think the market will discount some operating improvement as we move into 2018. Finally, WFC’s dividend yield, which we estimate at ≥70bps above the peer average from now until 2019, should offer downside support.