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Is Wells Fargo (WFC) Worth a Bet Post Q2 Earnings Beat?
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Wells Fargo & Company (WFC - Free Report) stock dropped 1.7% since the release of its second-quarter 2024 results on Jul 12, 2024. The lower net interest income (NII) outlook for 2024 led to a decline in its stock price. Before the release of its quarterly numbers, the stock performed exceedingly well. It was among the top three banks that outperformed the S&P 500 Index in the first half of 2024, gaining 22.2%. Bank of America (BAC - Free Report) and Citigroup, Inc. (C - Free Report) also outperformed the S&P 500 Index in the said time frame.
Image Source: Zacks Investment Research
One of the largest financial services companies in the United States, WFC’s revenues and earnings surpassed the Zacks Consensus Estimate in the reported quarter. It is worth mentioning that it registered a 38% surge in investment banking (IB) fees.
The stock is currently trading below its 50-day moving average, indicating a bearish sentiment among investors.
Image Source: Zacks Investment Research
Given the recent weakness in the WFC stock, investors might be tempted to buy it. But is this the right time to buy? Let’s find out.
Why WFC’s Long-Term Prospects Seem Favorable
Rate Cut Signal: The Federal Reserve chairman, Jerome Powell, signaled that the central bank is inching closer to cutting interest rates and cited recent inflation readings and the cooling job market as the primary reasons. Interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in NII, they have driven up funding and deposit costs, thus squeezing banks’ margins.
Wells Fargo's NII and net interest margin (NIM) have been subdued by the increased funding costs as the high interest rate environment weighed on it. Management expects 2024 NII to be in the upper half of the range of down 7-9% from 2023 or down 8-9%. As interest rates come down, it will be a boon and support NIM expansion. Management expects that if the Fed were to start cutting rates later this year, deposit pricing would begin to decline, with the most immediate impact from new promotional rates in its consumer business and standard pricing for commercial deposits, where pricing moves faster as rates increase.
Diverse Revenue Streams: The company is diverging revenue sources and reducing its reliance on NII. During the second quarter conference call, management noted that the enhanced credit card platform with more competitive offerings is driving strong credit card spending and new account growth. In the second quarter, the company launched two new credit cards, a small business card and a consumer card.
Further, the company has been methodically strengthening its corporate investment bank as it sees significant growth opportunities. Like BAC and C, WFC posted a double-digit rise in IB fees (in the Corporate and Investment Banking division).
WFC significantly raised advisor retention in its wealth and investment management division and has put more of an emphasis on serving its consumer banking clients and independent advisers, both of which should eventually spur development. The company's goals in the Commercial Bank division are to expand its treasury management business and provide clients with its investment banking and market capabilities.
Optimizing Branch Network: Wells Fargo keeps investing in and optimizing its branch network. It is being more deliberate about branch location strategy, as the number of branches declined 5% in the second quarter from a year ago to 4,227. As part of its attempts to improve the branch experience, the company is investing more in branch staff and upgrading technology. One such improvement is a new digital account opening process that has proven beneficial for bankers and consumers alike.
Management is keen on updating its branches and upgraded 296 of them in the first half of this year. The company plans to update all the branches in the next five years.
WFC's mobile user base is expanding rapidly, with 6% more active users now than a year ago. Its AI-powered virtual assistant — Fargo — has more than 117 million interactions and close to 15 million users a year after its launch. This momentum is expected to continue as the company undertakes further improvements to provide clients with more self-service options and value-added information, such as balanced trends and subscription expenditures.
Capital Distribution: Wells Fargo rewards its shareholders handsomely. Following the 2024 stress test result, the company plans to increase its third-quarter common stock dividend by 14% to 40 cents per share, subject to approval by the board of directors. The company has a share repurchase program in place. In July 2023, the company’s board of directors authorized a new share repurchase program worth $30 billion. The company repurchased over $12 billion of common stock during first-half 2024. Management expects to buy back more of its common stock in 2024 compared with 2023.
The company has a strong liquidity position, with a liquidity coverage ratio of 126% as of the second quarter of 2024. As of Jun 30, 2024, its liquid assets (including cash and due from banks, as well as interest-earning deposits with banks) totaled $232.0 billion.
The company’s capital position remains strong and it continues to use it to support its customers while also prudently returning excess capital to the shareholders.
Asset Cap is Impeding Growth
While expected rate cuts and efforts to increase fee-based revenue streams are key to future growth, investors should not ignore the challenges Wells Fargo is facing.
The biggest drawback of Wells Fargo is that it has an asset cap of $1.95 trillion imposed by the Federal Reserve because of the 2016 sales scandal until it complies fully with regulators’ demands regarding compliance and operational risk management.
Though the company has undertaken several measures to meet regulators' requirements, the asset cap is hindering the company from fully capitalizing its loan portfolio. Thus, this will likely continue to impede growth going forward.
Analyst Sentiments Down
Following the release of quarterly numbers, analysts seem to be bearish about Wells Fargo’s prospects. Over the past seven days, the Zacks Consensus Estimate for 2024 earnings has remained unchanged while the estimate for 2025 earnings moved downward.
Image Source: Zacks Investment Research
WFC Trading at A Discount
From a valuation standpoint, Wells Fargo appears somewhat inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 11.14X, below the industry average of 11.80X. The stock is also significantly cheaper than its peer, Bank of America’s current forward 12-month P/E of 12.24X.
Image Source: Zacks Investment Research
Keep an Eye on the Stock
While Wells Fargo's recent price drop seems promising, caution is warranted for prospective investors. While the bank has demonstrated strong performance in several areas, subdued NII performance in the upcoming period raises concern among investors.
However, the company’s strength in fee-based business, along with its global presence and branch optimization, positions it for future success.
The bank's performance in the future will be greatly influenced by its capacity to control expenses and negotiate the high-interest rate environment. With an asset cap in place, WFC’s loan balance is not likely to improve much, hindering its growth potential. Investors should keep a close eye on these issues before making a well-informed investment decision.
Those who already own the WFC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term, given its strong fundamentals. It carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Is Wells Fargo (WFC) Worth a Bet Post Q2 Earnings Beat?
Wells Fargo & Company (WFC - Free Report) stock dropped 1.7% since the release of its second-quarter 2024 results on Jul 12, 2024. The lower net interest income (NII) outlook for 2024 led to a decline in its stock price. Before the release of its quarterly numbers, the stock performed exceedingly well. It was among the top three banks that outperformed the S&P 500 Index in the first half of 2024, gaining 22.2%. Bank of America (BAC - Free Report) and Citigroup, Inc. (C - Free Report) also outperformed the S&P 500 Index in the said time frame.
One of the largest financial services companies in the United States, WFC’s revenues and earnings surpassed the Zacks Consensus Estimate in the reported quarter. It is worth mentioning that it registered a 38% surge in investment banking (IB) fees.
The stock is currently trading below its 50-day moving average, indicating a bearish sentiment among investors.
Image Source: Zacks Investment Research
Given the recent weakness in the WFC stock, investors might be tempted to buy it. But is this the right time to buy? Let’s find out.
Why WFC’s Long-Term Prospects Seem Favorable
Rate Cut Signal: The Federal Reserve chairman, Jerome Powell, signaled that the central bank is inching closer to cutting interest rates and cited recent inflation readings and the cooling job market as the primary reasons. Interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in NII, they have driven up funding and deposit costs, thus squeezing banks’ margins.
Wells Fargo's NII and net interest margin (NIM) have been subdued by the increased funding costs as the high interest rate environment weighed on it. Management expects 2024 NII to be in the upper half of the range of down 7-9% from 2023 or down 8-9%. As interest rates come down, it will be a boon and support NIM expansion. Management expects that if the Fed were to start cutting rates later this year, deposit pricing would begin to decline, with the most immediate impact from new promotional rates in its consumer business and standard pricing for commercial deposits, where pricing moves faster as rates increase.
Diverse Revenue Streams: The company is diverging revenue sources and reducing its reliance on NII. During the second quarter conference call, management noted that the enhanced credit card platform with more competitive offerings is driving strong credit card spending and new account growth. In the second quarter, the company launched two new credit cards, a small business card and a consumer card.
Further, the company has been methodically strengthening its corporate investment bank as it sees significant growth opportunities. Like BAC and C, WFC posted a double-digit rise in IB fees (in the Corporate and Investment Banking division).
WFC significantly raised advisor retention in its wealth and investment management division and has put more of an emphasis on serving its consumer banking clients and independent advisers, both of which should eventually spur development. The company's goals in the Commercial Bank division are to expand its treasury management business and provide clients with its investment banking and market capabilities.
Optimizing Branch Network: Wells Fargo keeps investing in and optimizing its branch network. It is being more deliberate about branch location strategy, as the number of branches declined 5% in the second quarter from a year ago to 4,227. As part of its attempts to improve the branch experience, the company is investing more in branch staff and upgrading technology. One such improvement is a new digital account opening process that has proven beneficial for bankers and consumers alike.
Management is keen on updating its branches and upgraded 296 of them in the first half of this year. The company plans to update all the branches in the next five years.
WFC's mobile user base is expanding rapidly, with 6% more active users now than a year ago. Its AI-powered virtual assistant — Fargo — has more than 117 million interactions and close to 15 million users a year after its launch. This momentum is expected to continue as the company undertakes further improvements to provide clients with more self-service options and value-added information, such as balanced trends and subscription expenditures.
Capital Distribution: Wells Fargo rewards its shareholders handsomely. Following the 2024 stress test result, the company plans to increase its third-quarter common stock dividend by 14% to 40 cents per share, subject to approval by the board of directors. The company has a share repurchase program in place. In July 2023, the company’s board of directors authorized a new share repurchase program worth $30 billion. The company repurchased over $12 billion of common stock during first-half 2024. Management expects to buy back more of its common stock in 2024 compared with 2023.
The company has a strong liquidity position, with a liquidity coverage ratio of 126% as of the second quarter of 2024. As of Jun 30, 2024, its liquid assets (including cash and due from banks, as well as interest-earning deposits with banks) totaled $232.0 billion.
The company’s capital position remains strong and it continues to use it to support its customers while also prudently returning excess capital to the shareholders.
Asset Cap is Impeding Growth
While expected rate cuts and efforts to increase fee-based revenue streams are key to future growth, investors should not ignore the challenges Wells Fargo is facing.
The biggest drawback of Wells Fargo is that it has an asset cap of $1.95 trillion imposed by the Federal Reserve because of the 2016 sales scandal until it complies fully with regulators’ demands regarding compliance and operational risk management.
Though the company has undertaken several measures to meet regulators' requirements, the asset cap is hindering the company from fully capitalizing its loan portfolio. Thus, this will likely continue to impede growth going forward.
Analyst Sentiments Down
Following the release of quarterly numbers, analysts seem to be bearish about Wells Fargo’s prospects. Over the past seven days, the Zacks Consensus Estimate for 2024 earnings has remained unchanged while the estimate for 2025 earnings moved downward.
WFC Trading at A Discount
From a valuation standpoint, Wells Fargo appears somewhat inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 11.14X, below the industry average of 11.80X. The stock is also significantly cheaper than its peer, Bank of America’s current forward 12-month P/E of 12.24X.
Keep an Eye on the Stock
While Wells Fargo's recent price drop seems promising, caution is warranted for prospective investors. While the bank has demonstrated strong performance in several areas, subdued NII performance in the upcoming period raises concern among investors.
However, the company’s strength in fee-based business, along with its global presence and branch optimization, positions it for future success.
The bank's performance in the future will be greatly influenced by its capacity to control expenses and negotiate the high-interest rate environment. With an asset cap in place, WFC’s loan balance is not likely to improve much, hindering its growth potential. Investors should keep a close eye on these issues before making a well-informed investment decision.
Those who already own the WFC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term, given its strong fundamentals. It carries a Zacks Rank #3 (Hold) now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.