Wells Fargo & Company (WFC) is scheduled to report its third-quarter results on October 13, kicking off the earnings season with some other major banks. Investors will closely watch banks' earnings reports to understand how the higher-for-longer interest rates have influenced their financials.
In this piece, I have discussed what analysts expect about WFC’s upcoming report and why waiting for an opportune entry point in the stock could be wise.
For the third quarter, WFC’s EPS is expected to decline 5.1% year-over-year to $1.23. On the other hand, its revenue is expected to rise 3% year-over-year to $20.10 billion. The company has a solid earnings history, having beaten the consensus estimate in each of the trailing four quarters.
During the previous quarter, the company’s earnings beat was driven by higher net interest income arising out of higher interest rates.
On September 29, 2023, the company announced that it had sold its private equity investments in certain Norwest Equity Partners (NEP) and Norwest Mezzanine Partners (NMP) funds to a group of investors, including AlpInvest Partners, Atalaya Capital Management, Lexington Partners, and Pantheon.
WFC’s CFO Mike Santomassimo said, “With this transaction, we are continuing with our strategic efforts to focus on Wells Fargo’s core businesses and customers.” The interest rates, which have been at their highest level in 22 years, are expected to boost its net interest income in the third quarter. However, deposit outflows, higher funding costs, and an inverted yield curve might pressure the bank’s margins.
The bank has been paying fines for its consumer and investor violations. The fake accounts scandal, which had surfaced years back, damaged the bank's reputation. Due to its regulatory violations, it is operating under a 2018 order from the Federal Reserve, under which it has a cap on its total assets.
Since the fake accounts scandal surfaced, WFC has paid out $12.9 billion in penalties, settlements, and customer remediations, $235 million of which came in August. “We remain at risk of further regulatory actions until the work is complete,” said WFC’s President and CEO Charles Scharf during the bank’s second-quarter earnings call.
CFRA’s big bank analyst Ken Leon said, “The company continues at a very moderated pace to make improvement, but we don’t see a game changer here.” He changed his rating on the stock to Hold from Buy.
WFC’s stock has gained 5.6% over the past six months and declined 4.2% over the past year to close the last trading session at $39.71.
Here’s what you might want to consider ahead of its upcoming earnings release:
Robust Financials
WFC’s total revenue for the second quarter ended June 30, 2023, increased 20.5% year-over-year to $20.53 billion. Its net income rose 57.2% year-over-year to $4.94 billion. Its EPS came in at $1.25, representing an increase of 66.7% year-over-year.
Its ROE came in at 11.4%, compared to 7.2% in the prior-year quarter. Its Return on Assets (ROA) came in at 1.05%, compared to 0.66% in the year-ago quarter. Also, its net interest income rose 29% year-over-year to $13.16 billion. In addition, its CET1 ratio came in at 10.7%. compared to 10.4% in the year-ago period.
Mixed Analyst Estimates
WFC’s EPS and revenue for fiscal 2023 are expected to increase 8.8% and 10% year-over-year to $4.85 and $81.14 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to decline 2.7% and 2.7% year-over-year to $4.72 and $78.92 billion, respectively.
Mixed Valuation
In terms of forward non-GAAP P/E, WFC’s 8.20x is 7.1% lower than the 8.83x industry average. Its 0.56x forward non-GAAP PEG is 53.2% lower than the 1.19x industry average. Likewise, its 1.79x forward Price/Sales is 18.3% lower than the 2.19x industry average.
On the other hand, in terms of trailing-12-month GAAP P/E, WFC’s 10.05x is 8.6% higher than the 9.25x industry average.
Weak Profitability
WFC’s 9.44% trailing-12-month Return on Common Equity is 17% lower than the 11.37% industry average. Likewise, its 21.40% trailing-12-month net income margin is 17% lower than the 25.78% industry average. Furthermore, the stock’s 0.86% trailing-12-month Return on Total Assets is 24.8% lower than the industry average of 1.15%.
POWR Ratings Reflect Uncertainty
WFC has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WFC has a C grade for Value, consistent with its mixed valuation. Its 1.17 beta justifies its C grade for Stability.
It has a C grade for Sentiment, in sync with its mixed analyst estimates.
WFC is ranked #2 out of 10 stocks in the Money Center Banks industry. Click here to access WFC’s Growth, Momentum, and Quality ratings.
Bottom Line
Muted loan growth stemming out of the uncertain macroeconomic environment and the higher interest rates will likely have affected WFC’s third-quarter earnings. The bank has a considerable commercial real estate (CRE) portfolio, and given the struggles of commercial real estate, it is likely to have increased its reserves to shield itself from potential losses arising out of its CRE portfolio.
The high mortgage rates mean that home loans were less in demand. Additionally, the slowdown in the deal-making segment is expected to have hurt its earnings.
The bank faces the challenges of potential credit rating downgrades, slowing loan growth, higher deposit costs, and the possibility of a recession. Given mixed analyst estimates and valuation, it could be wise to wait for a better entry point in the stock.
How Does Wells Fargo & Company (WFC) Stack Up Against Its Peers?
WFC has an overall POWR Rating of C, equating to a Neutral rating. You may check out these B-rated stocks within the Foreign Banks industry: Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), Akbank T.A.S. (AKBTY), and Banco do Brasil S.A. (BDORY). For exploring more Buy-rated Foreign Banks stocks, click here.
What To Do Next?
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WFC shares were trading at $40.16 per share on Tuesday afternoon, up $0.46 (+1.16%). Year-to-date, WFC has declined -0.58%, versus a 15.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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