Money-center bank Wells Fargo (WFC) will report second quarter fiscal 2022 earnings results before the opening bell Friday. And investors are hoping the bank can produce results that reverse the recent decline in the stock.
We are indeed in a rising rate environment. The Fed has raised rates on multiple occasions, which is typically good for bank stocks. That’s because the profits the banks earn is highly correlated to how they invest deposits versus the interest they pay consumers on those deposits which is called the spread. However, the prospects of higher interest rates alone has not prevented banks from being punished with the overall market.
Fears of a recession and potentially an increase of defaults in loans and lower profits have pressured banks. For Wells Fargo, which is currently down 17% year to date, with a 9% decline over the past year, the shares have fallen more than 30% from its 52-week highs. This decline has created what I think is a prime buying opportunity. Aside from the fact that the bank recently passed the Fed’s stress test, the bank's charge-offs and core provisioning have improved over the past several quarters.
Plus, metrics such as adjusted expenses are also trending in the right direction, helping to bolster its balance sheet, and enabling the bank to raise its quarterly dividend 20%. From a valuation perspective, the market is discounting Wells Fargo’s tangible book value relative to its peer group, which boast fewer deposits and loans. What’s more, the bank also has $20 billion worth of buybacks to execute over the next twelve months, thanks to its much stronger balance sheet due to the bank’s cost-saving initiatives. Having overcome its legacy issues, Wells Fargo seems ready to execute on its growth objectives.
For the three months that ended June, analysts expect Wells Fargo to earn 91 cents per share on revenue of $17.73 billion. This compares to the year-ago quarter when earnings were $1.38 per share on revenue of $20.27 billion. For the full year, ending in December, earnings are projected to decline 15.7% year over year to $4.06 per share, while full-year revenue of $73.49 billion would decline 6.4% year over year.
The year-over-year projected decline in both the top and bottom lines might seem discouraging, but much of that is attributable to the Fed’s accommodative monetary policies which in 2021 helped banks adjust for weak loan demand and downbeat net interest margin as well as the overall pressures weak interest rates have had on their lending businesses. For Wells Fargo, the once-troubled bank continues to demonstrate meaning operational improvements thanks to, among other things, strong balance sheet and reduction in loan loss provisions.
In the first quarter, the bank reported revenues of $17.59 billion which missed estimates by $230 million and declined 2.6% year over year. Non-interest revenue also fell 28% sequentially, while falling 14% from the year ago quarter. The latter was due to a combination of lower mortgage banking income which declined 33% as well as a reduction in trading activity and investment banking fees. However, the bank earned $3.7 billion in net income, with Q1 EPS of 88 cents topping consensus estimate by 8 cents.
The earnings beat was driven by a combination of sequential loan growth of both consumer and commercial loans. There was also a noticeable improvement in the bank’s net interest margin on a taxable equivalent basis, coming in at 2.16%, above the 2.11% it posted in the fourth quarter and 2.05% in the produced the year-ago quarter. On Friday, Wells Fargo will look to build on these positive results.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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