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Pre Q2 Earnings: How Should You Play Wells Fargo (WFC)?
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Wells Fargo & Company (WFC - Free Report) is slated to report second-quarter 2024 results on Jul 12, before the market opens.
WFC has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an earnings surprise of 11.42%, on average.
Image Source: Zacks Investment Research
This time, decent loan demand, higher rates, and modest mortgage banking performance are expected to aid the top line. In contrast, weakness in the company’s investment banking (IB) business will likely be a spoilsport. The Zacks Consensus Estimate for second-quarter revenues is pegged at $20.28 billion, suggesting a 1.2% decline from the year-ago quarter's reported figure.
For quarterly earnings, in the past month, the consensus estimate has been revised marginally upward to $1.27. This reflects a 1.6% growth from the $1.25 reported in the prior year quarter.
Image Source: Zacks Investment Research
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Wells Fargo this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Loans and Net Interest Income (NII): The demand for overall loans, especially commercial and industrial loans, improved from the first quarter of 2024 end, per the Federal Reserve’s latest data. A stabilizing macroeconomic backdrop and the expectations of the Fed easing interest rates going forward are likely to have offered some support to the lending scenario in the quarter.
While the reinvestment of securities run-off into higher-yielding assets is expected to have supported net interest income (NII) growth, high interest rates (at a 22-year high of 5.25-5.5%) are likely to have weighed on loan demand.
Although WFC is anticipated to have seen stable deposit balances during the second quarter of 2024, the funding cost remains high. This might have increased interest expenses.
The Zacks Consensus Estimate for NII is pegged at $12.09 billion, indicating a 1.1% decline on a sequential basis.
Non-Interest Revenues: In the second quarter, mortgage rates decreased marginally, with the rate on a 30-year fixed mortgage declining to 6.7% in June from 6.8% at the start of April. This is likely to have resulted in a slight rise in mortgage demand. Origination volumes (particularly purchase originations) remained lower than in the prior quarter due to home price appreciation.
Yet, supported by lower mortgage rates, there is the likelihood of a modest rise in refinancing activities. Also, with the borrowers accepting the fact that interest rates will remain high for a more extended period, it is likely to have provided support to WFC’s mortgage banking income.
The Zacks Consensus Estimate for mortgage banking revenues is pegged at $256.5 million, suggesting a 11.5% rise from the prior quarter’s levels.
The company’s investment advisory and other asset-based fee revenues are likely to have improved from higher market valuations and transactional activities. The consensus mark for investment advisory and other asset-based fee revenues is pegged at $2.37 billion, calling for a sequential rise of 1.5%.
In the quarter under review, the investment banking (IB) business showed a turnaround from the discouraging performance in the past two years. Merger and acquisition volumes and equity capital market volumes witnessed a surge globally in the first half of the year, driven by solid financial performance, fading recession risks, buoyant markets, and expected rate cuts this year. Yet, tough scrutiny by antitrust regulators and lingering geopolitical tensions were headwinds.
Hence, the Zacks Consensus Estimate for IB income is pegged at $560.6 million, suggesting a 10.6% decline from the prior quarter’s tally.
The company is likely to have witnessed a rise in its card fees, given the increased consumer spending. The Zacks Consensus Estimate for Card fees’ is pegged at $1.09 billion, suggesting an increase of 3.1% on a sequential basis.
The Zacks Consensus Estimate for Wells Fargo’s total non-interest income is pegged at $8.04 billion, calling for a 6.9% fall sequentially.
Expenses: Wells Fargo’s costs are expected to have continued flaring up in the second quarter, given its franchise investments in technology and digitalization efforts. This is likely to have hindered bottom-line growth in the quarter to be reported.
Asset Quality: With expectations of an uncertain macroeconomic outlook, Wells Fargo’s credit quality is likely to have deteriorated. Given the heightened market volatility, commercial loan defaults are expected to have risen. As the company has substantial exposure to commercial loans, it is likely to have set aside significant reserves in the second quarter.
The consensus mark for total non-accrual loans is pegged at $8.91 billion, suggesting a sequential rise of 10.4%.
Price Performance & Valuation
Wells Fargo was among the top three performing banks on the S&P 500 index in the first half of 2024, with the other two lenders being Citigroup (C - Free Report) and JPMorgan (JPM - Free Report) . All three stocks have outperformed the S&P 500 index.
First Half 2024 Price Performance
Image Source: Zacks Investment Research
C and JPM are scheduled to announce second-quarter results on the same day as WFC.
Now, let’s look at the value WFC offers investors at current levels.
Currently, WFC is trading at 11.28X forward 12 months' earnings, slightly below the industry’s forward earnings multiple of 11.45X. The company’s valuation looks somewhat cheaper compared with the industry average.
Price-to-Earnings (Forward 12 Months)
Image Source: Zacks Investment Research
Investment Thesis: Balancing Risk and Reward
WFC is well poised to benefit from its efforts to engage in cost-cutting measures, including the streamlining of its organizational structure, closure of branches, and reduction in headcount. With a stabilizing deposit balance, a large base of retail clients will likely support financials going forward.
Further, the company rewards its shareholders handsomely. Following the clearance of the 2024 stress test, the bank plans to increase its third-quarter 2024 common stock dividend by 14% to 40 cents per share. Management expects to repurchase more of its common stock this year compared with 2023.
However, Wells Fargo has an asset cap in place because of the 2016 sales scandal until it complies fully with regulators’ demands regarding compliance and operational risk management. Though the company has taken several measures to meet regulators' requirements, the asset cap is hindering the company from fully capitalizing its loan portfolio. Thus, this will likely impede growth going forward.
Conclusion
As Wells Fargo approaches to announce its second quarter 2024 earnings result, the improving loan demand, decent deposit balance, and lower mortgage rates showcase a positive picture for the bank.
The lender’s focus on dividends and buybacks is likely to drive total returns for years to come, especially if the economy strengthens. The Fed’s signal to cut the rate by the end of 2024 will provide support to its financials as the deposit costs come down.
Prospective investors should exercise caution due to near-term net interest margin contraction and weakening asset quality. Also, with an asset cap in place, WFC’s loan balance is not likely to improve much, hindering its growth potential.
Based on these factors, investors should not rush in to buy the stock but rather wait for a better entry point. Those who already have the WFC stock in their portfolio can hold on to it, considering its strong fundamentals and future growth perspective.
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Pre Q2 Earnings: How Should You Play Wells Fargo (WFC)?
Wells Fargo & Company (WFC - Free Report) is slated to report second-quarter 2024 results on Jul 12, before the market opens.
WFC has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with an earnings surprise of 11.42%, on average.
This time, decent loan demand, higher rates, and modest mortgage banking performance are expected to aid the top line. In contrast, weakness in the company’s investment banking (IB) business will likely be a spoilsport. The Zacks Consensus Estimate for second-quarter revenues is pegged at $20.28 billion, suggesting a 1.2% decline from the year-ago quarter's reported figure.
For quarterly earnings, in the past month, the consensus estimate has been revised marginally upward to $1.27. This reflects a 1.6% growth from the $1.25 reported in the prior year quarter.
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Wells Fargo this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Wells Fargo has an Earnings ESP of -0.50% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
Factors to influence WFC’s Q2 Results
Loans and Net Interest Income (NII): The demand for overall loans, especially commercial and industrial loans, improved from the first quarter of 2024 end, per the Federal Reserve’s latest data. A stabilizing macroeconomic backdrop and the expectations of the Fed easing interest rates going forward are likely to have offered some support to the lending scenario in the quarter.
While the reinvestment of securities run-off into higher-yielding assets is expected to have supported net interest income (NII) growth, high interest rates (at a 22-year high of 5.25-5.5%) are likely to have weighed on loan demand.
Although WFC is anticipated to have seen stable deposit balances during the second quarter of 2024, the funding cost remains high. This might have increased interest expenses.
The Zacks Consensus Estimate for NII is pegged at $12.09 billion, indicating a 1.1% decline on a sequential basis.
Non-Interest Revenues: In the second quarter, mortgage rates decreased marginally, with the rate on a 30-year fixed mortgage declining to 6.7% in June from 6.8% at the start of April. This is likely to have resulted in a slight rise in mortgage demand. Origination volumes (particularly purchase originations) remained lower than in the prior quarter due to home price appreciation.
Yet, supported by lower mortgage rates, there is the likelihood of a modest rise in refinancing activities. Also, with the borrowers accepting the fact that interest rates will remain high for a more extended period, it is likely to have provided support to WFC’s mortgage banking income.
The Zacks Consensus Estimate for mortgage banking revenues is pegged at $256.5 million, suggesting a 11.5% rise from the prior quarter’s levels.
The company’s investment advisory and other asset-based fee revenues are likely to have improved from higher market valuations and transactional activities. The consensus mark for investment advisory and other asset-based fee revenues is pegged at $2.37 billion, calling for a sequential rise of 1.5%.
In the quarter under review, the investment banking (IB) business showed a turnaround from the discouraging performance in the past two years. Merger and acquisition volumes and equity capital market volumes witnessed a surge globally in the first half of the year, driven by solid financial performance, fading recession risks, buoyant markets, and expected rate cuts this year. Yet, tough scrutiny by antitrust regulators and lingering geopolitical tensions were headwinds.
Hence, the Zacks Consensus Estimate for IB income is pegged at $560.6 million, suggesting a 10.6% decline from the prior quarter’s tally.
The company is likely to have witnessed a rise in its card fees, given the increased consumer spending. The Zacks Consensus Estimate for Card fees’ is pegged at $1.09 billion, suggesting an increase of 3.1% on a sequential basis.
The Zacks Consensus Estimate for Wells Fargo’s total non-interest income is pegged at $8.04 billion, calling for a 6.9% fall sequentially.
Expenses: Wells Fargo’s costs are expected to have continued flaring up in the second quarter, given its franchise investments in technology and digitalization efforts. This is likely to have hindered bottom-line growth in the quarter to be reported.
Asset Quality: With expectations of an uncertain macroeconomic outlook, Wells Fargo’s credit quality is likely to have deteriorated. Given the heightened market volatility, commercial loan defaults are expected to have risen. As the company has substantial exposure to commercial loans, it is likely to have set aside significant reserves in the second quarter.
The consensus mark for total non-accrual loans is pegged at $8.91 billion, suggesting a sequential rise of 10.4%.
Price Performance & Valuation
Wells Fargo was among the top three performing banks on the S&P 500 index in the first half of 2024, with the other two lenders being Citigroup (C - Free Report) and JPMorgan (JPM - Free Report) . All three stocks have outperformed the S&P 500 index.
First Half 2024 Price Performance
C and JPM are scheduled to announce second-quarter results on the same day as WFC.
Now, let’s look at the value WFC offers investors at current levels.
Currently, WFC is trading at 11.28X forward 12 months' earnings, slightly below the industry’s forward earnings multiple of 11.45X. The company’s valuation looks somewhat cheaper compared with the industry average.
Price-to-Earnings (Forward 12 Months)
Investment Thesis: Balancing Risk and Reward
WFC is well poised to benefit from its efforts to engage in cost-cutting measures, including the streamlining of its organizational structure, closure of branches, and reduction in headcount. With a stabilizing deposit balance, a large base of retail clients will likely support financials going forward.
Further, the company rewards its shareholders handsomely. Following the clearance of the 2024 stress test, the bank plans to increase its third-quarter 2024 common stock dividend by 14% to 40 cents per share. Management expects to repurchase more of its common stock this year compared with 2023.
However, Wells Fargo has an asset cap in place because of the 2016 sales scandal until it complies fully with regulators’ demands regarding compliance and operational risk management. Though the company has taken several measures to meet regulators' requirements, the asset cap is hindering the company from fully capitalizing its loan portfolio. Thus, this will likely impede growth going forward.
Conclusion
As Wells Fargo approaches to announce its second quarter 2024 earnings result, the improving loan demand, decent deposit balance, and lower mortgage rates showcase a positive picture for the bank.
The lender’s focus on dividends and buybacks is likely to drive total returns for years to come, especially if the economy strengthens. The Fed’s signal to cut the rate by the end of 2024 will provide support to its financials as the deposit costs come down.
Prospective investors should exercise caution due to near-term net interest margin contraction and weakening asset quality. Also, with an asset cap in place, WFC’s loan balance is not likely to improve much, hindering its growth potential.
Based on these factors, investors should not rush in to buy the stock but rather wait for a better entry point. Those who already have the WFC stock in their portfolio can hold on to it, considering its strong fundamentals and future growth perspective.