Wells Fargo Drops on Disappointing Revenues, Fee Income Falters

Shares of Wells Fargo (NYSE: WFC) faltered 4.5% to close at $46.35 on Thursday. The fall in price followed a Q1-2022 revenue miss despite upbeat earnings. The reduction in fee revenue mainly impacted the results. 

Results in Detail 

Including certain non-recurring items, Wells Fargo reported Q1 earnings of $0.88 per share compared to $1.02 recorded in the same quarter last year. Results beat analysts’ expectations of $0.80 per share. Net income fell 19.6% to $3.7 billion. 

Total revenue dropped 5% year-over-year to $17.6 billion and missed the consensus estimate of $17.8 billion, mainly due to lower fee income. 

Net interest income came in at $9.2 billion, up 5%, while non-interest income decreased 13.4% to $8.37 billion. 

Net interest margin was 2.16% in the quarter, up 11 basis points. The efficiency ratio of 79% increased from 75% in the prior-year quarter. 

Wells Fargo’s Commercial Banking segment recorded revenues of $2.3 billion, up 12% year-over-year, while revenues in the Consumer Banking and Lending segment declined 1% to $8.56 billion. Additionally, the Wealth and investment management division reported revenues of $3.76 billion, up 6%, while Corporate and Investment Banking revenues decreased 4%. 

Particularly, debit and credit card volumes, along with auto loans, escalated, while home lending disappointed on lower mortgage originations due to higher rates. Also, less client activity in capital markets and a reduction in investment banking revenues acted as headwinds. 

Reflecting prudent expense management, non-interest expenses came in at $13.9 billion, down 1% year-over-year on the back of lower personnel expenses, partly mitigated by elevated non-personnel expenses. Nevertheless, expenses were higher-than-expected due to operating losses related to remedial measures taken for customers’ historical matters. 

Provision for credit losses came in at $787 million, compared with $1.05 billion in the same quarter last year. 

Other Metrics 

Wells Fargo reported average loans of $898 billion, up 3% from the prior-year quarter. Also, average deposits grew 5% to $1.5 trillion. 

As of March 31, 2022, the Common Equity Tier 1 (CET1) capital ratio stood at 10.5%. Total Loss Absorbing Capacity (TLAC) as a percentage of total risk-weighted assets came in at 22.3%, above the minimum requirement of 21.5% 

During the quarter, the company repurchased 110.1 million shares of common stock for $6 billion. 

Official Comments 

Wells Fargo CEO Charlie Scharf commented, “We are moving forward with our risk and control infrastructure work and continue to note that our path forward will be uneven but remain confident in our ability to continue to close remaining gaps over the next several years.” 

“Wells Fargo is positioned well to provide support for our clients in a slowing economy. While we will likely see an increase in credit losses from historical lows, we should be a net beneficiary as we will benefit from rising rates, we have a strong capital position, and our lower expense base creates greater margins from which to invest,” Scharf added. 

For 2022, management expects net interest income to be up mid-teens percentage-wise from 2021 on the back of higher loan growth and recent forward rate curves. Non-interest expenses are expected to be $51.5 billion. 

Wall Street’s Take 

Following the Q1 results, Goldman Sachs analyst Richard Ramsden maintained a Hold rating on the stock but lifted the price target to $56 (20.82% upside potential) from $54. 

Ramsden believes that mixed results have been more than offset by the guidance provided by Wells Fargo. The analyst considers guidance to be “much stronger than expected.” 

Shares of Wells Fargo have rallied about 11.4% over the past year, while the stock still scores a Strong Buy consensus rating based on 12 Buys and four Holds. That’s alongside an average Wells Fargo price target of $60.59, which implies 30.72% upside potential from current levels.

Investor Wisdom 

TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on Wells Fargo, with 7.3% of investors maintaining portfolios on TipRanks increasing their exposure to WFC stock over the past 30 days. Furthermore, 3.4% of these individuals have increased their holdings in the recent week. 

The Bottom Line 

Although there is geopolitical uncertainty, including the Ukraine-Russia conflict and rising inflation, a rise in interest rates is expected to aid Wells Fargo’s profitability. Despite lower mortgage banking, soft capital markets, and cost pressure, robust loans and deposits balance of the bank, along with high analyst ratings, are factors to be considered when investing in this stock.

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