Swell Fargo: Wells Crushes Earnings, But Investors Should Be Careful Here

Several of the nation’s largest banks released fourth-quarter financial performance data on Friday morning. Among them were JP Morgan (JPM), Citigroup (C) and the country’s fourth largest bank by assets held, Wells Fargo (WFC). Wells Fargo stock had come in strong, up 17% year-to-date at Thursday’s close against the KBW banking index, which closed Thursday up 12% for 2022.

For the quarter, Wells Fargo posted GAAP EPS of $1.38, beating Wall Street by about a quarter of a dollar. The $1.38 includes $0.18 per share attributable to the sale of the bank’s Corporate Trust Services business and Wells Fargo Asset Management, so even adjusted it’s a beat. Revenue generated during the reporting period totaled $20.86 billion, which was good for 12.8% year-over-year growth, and exceeded Wall Street expectations by well over of $2 billion.

Safe to say, and make no mistake, I’m biased… that CEO Charles Scharf is indeed turning this bank around. Non-interest expense was $13.198 billion, down from $13.3 billion in the third quarter and $14.8 billion for the year-ago comparison. Provisions for credit losses fell to -$452 million, benefiting from an $875 million release the company had set aside in early 2020 to cover pandemic-related loan losses that did not materialize. never materialized. This may somewhat inflate the profitability of the quarter, but understand that this provision is an actual profit that was previously withheld.

Loans of $875 billion increased sequentially from $854 billion last quarter, but fell $899.7 billion in the fourth quarter of 2020. Net interest margin on a tax equivalent basis s is at 2.11%, down from 2.03% last quarter, but down from 2.16% a year ago. Return on equity (ROE) printed at 12.8%, compared to 6.6% last year. Return on tangible equity (ROTCE) rose to 15.3% from 8%, and the bank’s efficiency ratio fell from 80% to 63%. (In banking, a lower efficiency ratio is better… ER = Expenses/Revenues).

The CEO

Wells Fargo CEO Charles Scharf commented, “As the economy continued to recover, we saw increased consumer spending, higher investment banking fees, higher asset-based fees strong in our wealth management and investment business, and strong capital gains in our venture capital and private equity affiliates. Scharf then said, “We continued to manage credit well and the strong economic environment helped reduce charges to historically low levels and our results benefited from reductions in our provision for credit losses.”

Sector performance

Performance is lumpy for each segment, as is profitability. We will proceed in descending order according to the revenue generated.

– Bank and consumer credit. Revenue rose 1% (y/y) to $8.733 billion. Net profit rose 37% to $1.862 billion. Within this group, autos were up 17%, credit cards were up 3%, while personal loans were down 9% and home loans were down 8%. Non-interest expense decreased 5%.

– Wealth and investment management. Revenue rose 6% to $3.648 billion. Net income increased 11% to $564 million. Non-interest expense increased 5%. Performance here was driven by higher asset-based fees at higher market valuations. Net interest income decreased by 7% for this activity.

– Corporate and investment banking. Revenue jumped 11% to $3.512 billion. Net income rose 64% to $1.454 billion. Investment banking rose 17%, driven by higher debt origination and advisory fees. Commercial real estate increased by 8%. Non-interest expense decreased 2%.

– Business. Revenue was much higher, up 113% to $3.12 billion. Net income rose 736% to $916 million. If those numbers seem unrealistic, they were produced by one-off sales from the company’s Corporate Trust Services business and Wells Fargo Asset Management. Non-interest expenses, likewise… were down 55%.

– The Commercial Bank. Revenue rose 1% to $2.284 billion. Net income more than doubled (+102%) to reach $954 million. Middle market banking increased 2%. Asset-backed lending and leasing increased 1%. Non-interest expenses decreased by 10%.

My minds

I love Wells Fargo. I’ve been a long time Wells Fargo follower. I like Charlie Scharf. Regular readers know this well. That said, I came in those numbers buttoned up tight so as not to lose a ton of dough. That added a little over half a dollar to my net base, which is around $30, so the protection kept me awake last night.

Wells Fargo is more dependent on traditional banking services than other major banks. Higher interest rates would be more of a plus for Wells Fargo than for its competitors. The flip side would be that higher interest rates will slow mortgage origination, which is very important here. I also see the possibility of the Fed removing the asset cap still in place at Wells Fargo for the outrageous issues that Charles Scharf was brought in to address. It cleans up this mess. That said, who oversees banking on the Federal Reserve Board of Governors matters to Wells Fargo.

That said, I believe WFC has a bright future, a potentially brighter future than its competitors. I just think we have to be careful here, because we’re closer to what I consider to be my target from where I started this journey.

Some of you have already seen this painting. Nothing has changed. WFC is still breaking out of a beautiful ascending triangle that produced our $52 pivot. My target price remains $62. I own the $55 puts that expire later in the day, so I don’t need them. My panic point will fall to $49, which is one dollar below the 50-day SMA.

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