Wells Fargo reported better-than-expected earnings results on Friday, but some weakness under the hood is weighing on the bank’s stock. Stay the course: Shares are more likely to rise as management continues to fend off regulatory penalties for past misdeeds. Total revenue for the three months ended March 31 rose lower than 1% from a 12 months ago to $20.86 billion, beating analysts’ expectations of $20.2 billion, in response to LSEG. Adjusted earnings of $1.26 per share were well above Wall Street’s consensus estimate of $1.11 per share, LSEG data showed. Note: EPS of $1.26 features a negative impact of 6 cents per share ($284 million on net income) from a special assessment by the Federal Deposit Insurance Corporation (FDIC) to bail out regional banks after Silicon’s failure Valley Bank not included last 12 months. This particular valuation fee created a headwind of 40 cents per share within the fourth quarter of 2023. Wells Fargo Why we own it: We bought Wells Fargo as a turnaround story under CEO Charlie Scharf. He has made progress in cleansing up the bank, fixing its previously bloated cost structure after a series of misdeeds before his term. Scharf has also worked to lift the Fed’s $1.95 trillion asset cap and increase Wells Fargo’s fee-generating revenue streams. Competitors: Bank of America and Citigroup. Weight within the club portfolio: 4.76%. Last Purchase: February 24, 2022. Initiated: January 8, 2021. Conclusion: The results are positive, even when some essential line items are missing. On the one hand, the bank’s overall efficiency ratio was barely higher than expected. (The ratio is noninterest expense divided by total sales; the lower the ratio, the higher the efficiency). However, we expect this number to say no over time as management continues to deal with regulatory concerns and makes progress toward ultimately lifting the asset cap. In addition, the online interest margin and thus the bank’s net interest income remained lower. We’re not too surprised considering rates of interest are a double-edged sword for banks. Higher rates of interest mean higher income from loans; They also mean higher funding costs (interest payments on deposits) as customers withdraw deposits elsewhere looking for higher returns. None of that is news: now we have been observing this dynamic for several quarters. However, higher rates of interest generally have a positive impact on Wells Fargo’s bottom line. Many positive elements outweighed the negative ones. For example, noninterest expense rose to a level above Street estimates this quarter, but noninterest income rose faster and above expectations. Likewise, the bank’s tangible book value per share was somewhat weak, but was greater than offset by a better-than-expected return on tangible common equity – a key metric that investors consider heavily when determining the suitable valuation multiple for a bank’s stock. Also positive: the bank’s provisions for loan defaults were significantly lower than expected. That’s especially good considering many had concerns about Wells Fargo’s business real estate exposure and consumers’ increasing credit usage as their savings declined attributable to the pandemic. CEO Charles Scharf said on the earnings call with investors: “As we continue to see strength in the U.S. economy, spending patterns of consumers using our debit and credit cards generally remain consistent and continue to grow year over year. Consumer credit is performing.” As we expect, wholesale credit continues to perform well and our views on commercial real estate have not changed significantly since last quarter. “In terms of return on capital, we were able to significantly increase returns to shareholders as the bank repurchased shares worth $6.1 billion (112.5 million shares) in the first quarter. That’s a significant increase from the $2.4 billion (51.7 million shares) repurchased in the fourth quarter. Furthermore, even if the CET-1 ratio – which compares a bank’s capital to its risk-weighted assets – is just below expectations, there is no reason to worry. There is still a lot of excess capital left for management to return to shareholders. Wells Fargo is on track to increase efficiency, increase ROTCE (Return on Average Tangible Common Shareholders’ Equity) toward management’s 15% target, and eliminate the asset cap imposed by the regulator. For this reason, we are increasing our price target on WFC shares from $60 to $62, but maintaining our 2 rating as we look for a better entry point. WFC YTD Mountain Wells Fargo YTD Guidance Wells Fargo’s management team maintained its outlook for full-year 2024 net interest income: 7% to 9% lower than the 2023 figure of $52.4 billion. This implies a range of $47.7 billion to $48.7 billion miss compared to the $48.8 billion consensus estimate going to press. We don’t like it when leadership is missing. However, bank interest income estimates depend on interest rates, a factor Wells cannot control. Management said Tuesday that it is still early in the year and ultimately “the amount of net interest income we generate will depend on a variety of factors, many of which are uncertain, including the composition and pricing of deposit holdings, the absolute amount.” interest rates, etc.” the shape of the yield curve and demand for credit.” Keep in mind that management has focused heavily on reducing the revenue contribution of interest-based revenue and instead focusing on increasing non-interest, fee-based revenue. We strongly support this move as it serves to reduce volatility and interest rate dependence, dynamics that management cannot control. “We are seeing early signs of equity and fee growth, which will be important as we diversify our revenues and reduce net interest income as a percentage of sales,” the corporate said. The forecast for noninterest expenses for the total 12 months was also left unchanged at around $52.6 billion. That’s barely below the expected $52.95 billion, which is positive. First Quarter Results: Retail banking and lending revenue fell nearly 3% year-over-year to $9.09 billion. Consumer and Small Business Banking (CSBB) revenue fell 4% because the tailwind of upper debit card fees was greater than offset by lower deposit balances. Among consumer loans, home equity loans remained flat year-over-year and increased 3% quarter-on-quarter. Credit card revenue increased 6% annually and three% sequentially. Auto loan revenue fell 23% 12 months over 12 months and 10% quarter over quarter. Personal loans rose 7% 12 months over 12 months but fell 1% sequentially. Commercial banking revenue fell 5% to $3.15 billion. Middle market banking revenue fell 4% year-over-year, while asset-based lending and leasing revenue fell 7% annually. Noninterest expenses decreased 4% attributable to a discount in personnel costs and efficiency improvements. Corporate and investment banking revenue rose nearly 2% to $4.98 billion. Total banking revenue rose 5% year-over-year, as a 3% decline in lending and a 13% decline in treasury management and payments revenue were greater than offset by a 69% increase in investment banking revenue. Commercial real estate revenue fell 7% as headwinds from lower loan balances were only partially offset by higher volumes of business mortgage-backed securities. Market return increased 2%, driven by a 6% increase in fixed income, currencies and commodities (FICC) income and a 3% increase in equity income. Noninterest expenses increased 5% annually attributable to higher operating costs, only partially offset by efficiency improvements. Wealth and investment management revenue rose about 2% to $3.74 billion. Net interest income fell 17% year-on-year as deposits fell as customers shifted money into higher-yielding securities. Non-interest income increased 9% because of higher asset fees driven by increased market valuations. Noninterest expenses increased 6% annually as higher sales-related compensation was only partially offset by efficiency initiatives. (Jim Cramer’s Charitable Trust is WFC. An entire list of stocks may be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Wells Fargo customers use the ATM at a bank branch on August 8, 2023 in San Bruno, California.
Justin Sullivan | Getty Images
Wells Fargo The bank reported better-than-expected earnings results on Friday, but weakness under the hood is weighing on the bank’s stock. Stay the course: Shares are more likely to rise as management continues to fend off regulatory penalties for past misdeeds.
