Wells Fargo (NYSE: WFC), deemed one of the “Big Four” American banks, is slated to report its second-quarter fiscal 2022 results on July 15, before the market opens.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Factors expected to have a significant impact on the results include rising interest rates; record-high mortgage rates; robust trading volumes; and declining fees from wealth management and investment banking businesses. In effect, banks will see their net interest income (NII) grow but non-interest income (except trading) decline.
Street’s Q2 Expectations from WFC
For the second quarter, the Street expects Wells Fargo to post earnings of $0.83 per share and earn revenue of $17.58 billion. This reflects a major slowdown over the prior year’s comparable quarter numbers for earnings and revenue of $1.38 per share and $20.27 billion, respectively.
The primary reasons for the expected drop in quarterly performance stem from the macroeconomic headwinds related to inflationary pressures, the ongoing war, and an overall economic slowdown.
Increasing Shareholder Returns: A Major Catalyst for Wells Fargo
After the Federal Reserve’s latest round of stress tests, WFC stated that “it expects its stress capital buffer (SCB) to be 3.2%, which represents a percentage amount of incremental capital the company must hold above its minimum regulatory capital requirements.”
Notably, the bank has announced its intent to increase its quarterly cash common dividend by 20% to $0.30 per share, subject to the Board’s approval. The increased dividend will be payable in Q3FY22. Moreover, the bank also stated that it would engage in significant share repurchases from Q3FY22 to Q2FY23.
This compares favorably with the other big banks in the sector, which have either left their dividends unchanged or raised them but not significantly.
Analysts Weigh in on WFC
Ahead of the banks’ Q2 earnings season, several analysts cut the price targets and model estimates on bank stocks in their coverage.
Morgan Stanley analyst Betsy Graseck cut the price target on WFC to $59 (49% upside potential) from $66 while maintaining a Buy rating. Graseck’s main concern is the rising recession risk, which may cut off some of the consumer banking income for banks.
Similarly, Citigroup analyst Keith Horowitz slashed the price target on WFC from $56 to $47 (18.7% upside potential) and maintained a Buy rating. According to Horowitz, rising interest rates will boost the bank’s net interest income, but investor sentiment remains negative on the sector owing to the Federal Reserve’s hawkish stand and resultant large credit losses, which may arise in the near term.
Overall, the Street is cautiously optimistic about WFC stock with a Moderate Buy consensus rating based on nine Buys and four Holds. The average Wells Fargo price target of $53.23 implies 34.4% upside potential to current levels. Meanwhile, the stock has lost 21.2% so far this year.
Ending Thoughts
Wells Fargo seems to be faring well for now, but the bank has limited upside growth potential with the Fed-imposed limit of growing assets above $1.95 trillion. The bank already has around $1.9 trillion in assets under management, which means it has very little room to grow. This acts as the biggest barrier for the bank to churning out more profit. Furthermore, under the current CEO’s stewardship, Wells Fargo is steadily clearing its name of the governance and internal control issues that have tarnished its image.
Overall, the June quarter witnessed some of the major actions, which set the tone for the rest of 2022. Yes, the rising interest rates are in the best interest of banks but they are also accompanied by lower loan demand by consumers. Meanwhile, the other banking services take a toll.
