Bank stocks have outperformed the broader S&P 500 Index in the first few trading weeks of the new year, driven by the prospect of rising interest rates. With the Financial Select Sector SPDR ETF (XLF) is up some 13% in six months, while rising 5.4% year to date, besting the S&P 500 index in both spans, it would seem any concern the market has had about the state of the economic recovery has vanished.
Wells Fargo (WFC), which is set to report fourth quarter fiscal 2021 earnings results before the opening bell Friday, has been one of the better-performing stocks within the financial sector, rising some 10% over the past thirty days and 23% over the past six months. With the stock now up 12% year to date, besting the 1.5% decline in the S&P 500 index, the market appears more willing to look beyond Wells Fargo’s legacy issues and focusing on long-term sustainability. Can the surge continue?
While there are still plenty of challenges for Wells Fargo, 2022 is poised to be a pivotal year. Not only has Wells Fargo’s charge-offs and core provisioning improved over the past few quarters, metrics such as adjusted expenses are also trending in the right direction, helping to bolster its balance sheet. Among 2022 tailwinds, the bank should benefit from potentially three interest rate increases which should boost its net interest margins and help drive earnings per share above pre-Covid levels. But its results on Friday and full-year guidance will be key in how the stock responds.
For the three months that ended December, analysts expect Wells Fargo to earn $1.09 per share on revenue of $18.69 billion. This compares to the year-ago quarter when earnings were 64 cents per share on revenue of $17.93 billion. For the full year, earnings are projected to be $4.67 cents per share, up from 41 cents per share a year ago, while full-year revenue of $76.21 billion would rise 5.4% year over year.
There’s no question that bank earnings over the past year has benefited from the Fed’s accommodative monetary policies which has helped banks adjust for weak loan demand and downbeat net interest margin and overall pressures weak interest rates have had on their lending businesses. For the just-ended quarter, Wall Street estimates calls for earnings to rise 3.6% on revenue growth of 3.4%. In the case of Wells Fargo, its projected full-year earnings growth of 1040% from 41 cents a year ago to $4.67 per share is nothing short of remarkable.
The once-troubled bank continues to demonstrate meaningful operational improvements thanks to, among other things, a strong balance sheet and reduction in loan loss provisions. Wells Fargo’s adjusted expenses are also trending in the right direction, helping to drive quarterly earnings. In the third quarter, EPS of $1.22 best estimates by 28 cents, while revenue of $18.83 billion topped forecasts by more than $500 million, thanks to strength in its consumer banking, commercial banking and investment banking segments.
The bank also saw sequential growth in both loans and deposits which rose 1% and 2%, respectively. Combined with declines in expenses and noticeable gains in its efficiency initiatives, Wells Fargo announced it is now in a position to increased its capital returns to shareholders, boosting its stock buyback and increasing its dividend. This suggests that the bank has fully transitioned from its regulatory “timeout” to core growth.
On Friday, Wells Fargo will need to show that it can build on its recent success. The management’s commentary about trends in the core banking business, particularly about loan demand will be key in how the stock responds.
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