Wells Fargo reported better-than-expected earnings results on Friday, but some weakness under the hood is putting a lid on the bank's shares. Stay the course: Stocks should rise as management continues to shake off regulatory penalties for past mistakes. Total revenue for the three months ended March 31 rose less than 1% from a year ago, to $20.86 billion, beating analysts' expectations of $20.2 billion, according to LSEG. Adjusted earnings of $1.26 per share were well above Wall Street estimates of $1.11 per share, LSEG data showed. Note: EPS of $1.26 excludes the negative impact of 6 cents per share ($284 million in net income) from the special assessment by the Federal Deposit Insurance Corporation (FDIC) to bail out regional banks after the failure of the Silicon Valley bank last year. This special valuation charge was a headwind of 40 cents per share in 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 been making progress in cleaning up the bank's operation and reforming its previously bloated cost structure after a series of misdeeds before his tenure. Scharf is also working to lift the Fed's $1.95 trillion asset cap and boost Wells Fargo's fee-generating revenue streams. Competitors: Bank of America, Citigroup Weight in Club Portfolio: 4.76% Last Purchase: February 24, 2022 Start: January 8, 2021 Bottom Line The results are skewed positively, even with some key items overlooked. First, the bank's overall efficiency ratio was slightly higher than expected. (The ratio is non-interest expenses divided by total revenues. The lower the ratio, the better the efficiency.) However, we expect to see this number decrease over time as management continues to address regulatory concerns and makes progress toward the eventual removal of the asset cap. In addition, the bank's net interest margin, and therefore net interest income, decreased. We're not too surprised considering interest rates are a double-edged sword for banks. Higher rates mean higher revenue generation on loans; They also mean higher financing costs (interest payments on deposits) as customers withdraw deposits in search of higher returns elsewhere. None of this is news: we've seen this dynamic play for several quarters already. However, overall, higher rates are a net positive for Wells Fargo's bottom line. Many of the positives outweigh the negatives. For example, non-interest expenses this quarter rose above Street estimates, but non-interest income rose at a faster rate and ahead of expectations. Likewise, tangible book value per share came in a bit weak, but was made up for by a better-than-expected return on tangible common stock performance – a key metric that investors carefully consider when determining the appropriate valuation multiple to place on a stock. Bank shares. Another plus: the bank's provisions for credit losses were much lower than expected. This is especially good given the concerns many have had about Wells Fargo's exposure to commercial real estate and the increased use of credit by consumers as their pandemic savings dwindle. In a post-earnings call with investors, CEO Charles Scharf said: “We continue to see strength in the U.S. economy, and the spending patterns of consumers using our debit and credit cards remain broadly stable and continue to grow year over year. Consumer credit performance and as we expect, Wholesale credit continues to perform well, and our views on commercial real estate have not changed significantly since last quarter.On the capital returns front, we had a big step up in shareholder returns, as the bank repurchased $6.1 billion worth of stock (112.5 million shares). In the first quarter. This is a significant increase from the $2.4 billion (51.7 million shares) repurchased in the fourth quarter. Moreover, although the CET 1 ratio – which compares a bank's capital against its risk-weighted assets – comes in below expectations, it does not There's plenty of excess capital left for management to return to shareholders. Wells Fargo is on track to increase efficiency, pushing ROTCE (return on average tangible equity) toward management's 15% target, and removing asset caps imposed by authorities Organizational. As a result, we are increasing our price target on WFC shares to $62 from $60, but maintain our rating of 2 as we look for a better entry point. Mountain Wells Fargo's YTD guidance WFC's management team has maintained its forecast for full-year 2024 net interest income: 7% to 9% below the $52.4 billion level achieved in 2023. This implies a range of 47.7 $1 billion to $48.7 billion, missing versus consensus estimate of $48.8 billion reported in print. We don't like to miss guidance. However, estimates of bank interest income depend on interest rates, a factor that Wells cannot control. Management said Tuesday that it is still early in the year, and ultimately “the amount of net interest income we earn will depend on a variety of factors, many of which are uncertain, including the mix of deposit balances and pricing, the absolute level of interest rates and the shape of the yield curve.” And the demand for loans.” Keep in mind that management has focused heavily on reducing the revenue contribution from interest-based revenues, focusing instead on increasing fee-based and non-interest revenues, a move we strongly support as it reduces volatility and dependence on interest rates. Dynamics that management cannot control. “We are starting to see early signs of equity and fee growth which will be important as we diversify our revenue and reduce net interest income as a percentage of revenue,” the company said. Non-interest expense guidance for the full year was also left unchanged at approximately $52.6 billion. This is slightly lower than the expected amount of $52.95 billion, which is positive. Q1 Results Banking and consumer lending revenues declined approximately 3% year over year to $9.09 billion. Retail and Small Business Banking (CSBB) revenue decreased 4% as an increase in debit card fees was offset by lower deposit balances. In consumer lending, home lending was flat compared to last year and rose 3% sequentially. Credit card revenue increased 6% year-over-year and 3% sequentially. Auto loan revenue was down 23% year over year and down 10% sequentially. Personal lending was up 7% from last year but down 1% sequentially. Commercial banking revenue fell 5% to $3.15 billion. Mid-market banking revenues declined 4% year-over-year, while asset-based lending and leasing revenues declined 7% year-over-year. Non-interest expenses decreased by 4% as a result of lower employee expenses and efficiency gains. Corporate and investment banking revenues rose nearly 2% to $4.98 billion. Total banking revenues increased 5% year over year, with a 3% decline in lending and a 13% decline in treasury management and payments revenues offset by a 69% increase in investment banking revenues. Commercial real estate revenues declined 7%, as headwinds from lower loan balances were only partially offset by higher commercial mortgage-backed securities volumes. Markets revenues rose 2% on the back of a 6% increase in fixed income, currencies and commodities (FICC) revenues, and a 3% increase in equities revenues. Non-interest expenses increased 5% annually, due to higher operating costs, which were only partially offset by efficiency gains. Wealth and investment management revenues increased by about 2% to $3.74 billion. Net interest income fell by 17% year-on-year due to lower deposits as a result of customers reallocating their cash to higher yielding securities. Non-interest income increased by 9% thanks to higher charges on assets as a result of higher market valuations. Non-interest expenses increased 6% year-over-year, with higher revenue-related compensation only partially offset by efficiency initiatives. (Jim Cramer's Charitable Trust is a long-term WFC. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. 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Wells Fargo customers use an ATM at a bank branch on August 08, 2023 in San Bruno, California.
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Wells Fargo It reported better-than-expected earnings results on Friday, but some weakness under the hood is putting a lid on the bank's shares. Stay the course: Stocks should rise as management continues to shake off regulatory penalties for past mistakes.
