Wells Fargo reported better-than-expected quarterly results ahead of Friday’s opening bell. We were also pleased to see that by the end of 2023, management has officially delivered on its multi-year cost savings program of $10 billion. But shares came under pressure due to a weaker-than-expected outlook. Total revenue for the three months ended Dec. 30 rose just over 2% year over year to $20.48 billion, beating analysts’ expectations of $20.3 billion, according to LSEG. Adjusted earnings per share of $1.29 beat the Wall Street consensus estimate of $1.17 per share, LSEG data showed. However, several one-time items impacted EPS in the quarter. In connection with the Federal Deposit Insurance Corporation’s (FDIC) special assessment in Q4, 40 cents was charged to large banks to pay for bailing out regional banks after last year’s Silicon Valley Bank failure; 20-cent severance pay; and a 17-cent discretionary tax benefit. Consensus did not factor in these special items, so we are not comparing earnings per item of $0.86 to estimates. WFC 1Y mountain Wells Fargo 1 year Still, Wells Fargo shares fell more than 3.5% as the bank warned that net interest income (NII) for 2024 could be lower year-on-year. Bottom Line While the results were a bit noisy, they were largely better than expected when one-time costs are factored in. Fourth quarter earnings beat expectations thanks to both net interest income and non-interest income. Core earnings performance – after adjusting for one-off factors – beat expectations, as did tangible book value at the end of 2023 and several key operating metrics that are critical to the bank’s valuation multiple. The fees that impacted earnings were also reflected in the shortfalls we see in the ratio of efficiency, non-interest expense and return on tangible common equity (ROTCE). Without all that, they were above estimates. ROTCE was a better-than-expected 13.4% in the fourth quarter, and management continues to see an “achievable path to a sustainable ROTCE of 15% over the medium term.” The above expenses also added $2.28 billion to the non-interest expense line – so the result was also better than expected on an underlying basis of about $13.51 billion. Using this non-interest expense base number, we can calculate a core efficiency ratio (non-interest expense divided by total revenue) of about 66%, which is better than expected. Ultimately, these three crucial operating metrics on an underlying basis — which is what long-term investors should be concerned with — were better than the reported results suggest. Wells Fargo’s common equity tier-one (CET1) ratio also beat expectations. This is a key metric to be aware of – especially ahead of the expected increase in capital requirements from global regulators. CET1 ratios highlight the bank’s ability to continue to support cash returns to shareholders like us. To that end, management returned $2.4 billion to shareholders in the fourth quarter by repurchasing 51.7 million shares and paid a common stock dividend of 35 cents per share during the final three months of 2023. , we have to admit that management’s outlook for 2024 is weaker than what the Street was looking for. But we’re not overly concerned, and it certainly doesn’t change our outlook for the stock in 2024. In fact, Jim Cramer said during the morning club meeting on Friday that he thinks a level around $45 a share for Wells Fargo would present buying opportunities. ROTCE is a key metric that investors must consider when determining the appropriate multiple to place on a bank’s tangible book value. The stock currently trades at around 1.2x – but if we can get ROTCE to that 15% target, we believe the stock could trade at a multiple closer to 1.5x, which based on year-end tangible book value 2023 is just under $59 per share. This is before factoring in the increase in tangible book value that would result from the improvement in the ROTCE rate. That means we still have a ways to go to get there – and as a result, reiterate our 1 rating and $54 price target. It’s important to keep in mind that banking advice generally depends on interest rates, over which firms like Wells Fargo have little or no control. Timing is also important. In this case, management anticipates five Federal Reserve rate cuts that will hit the net interest income outlook for 2024. Lower rates mean less money for traditional lenders like Wells Fargo. If we get fewer cuts, Wells Fargo could see a higher NII than management predicts. Wells Fargo’s guide was based on the Jan. 5 market yield curve, which pegged the average Fed Funds rate at 4.16% in the fourth quarter of 2024. That translates to about five rate cuts of 0.25 percentage points. If the Fed ends up cutting rates less aggressively than the curve suggests, that could mean an improvement in Wells Fargo’s NII forecast. For some idea of what the difference might be, management explained in the call that its current sensitivity to rates means that every 100 basis point move in rates could impact NII by several billion dollars. With Thursday’s warmer-than-expected December CPI, we think the downside risk (meaning more than five Fed cuts) is limited, but as always will depend on the data. We also see some areas where management should reduce spending if necessary, as guidance for planned efficiency initiatives of $2.7 billion is fully offset by incremental spending on technology and equipment, expected merit increases and other growth investments, which could probably be delayed if necessary. If we were to get another rate cut, that would probably mean the economy isn’t doing too hot, so delaying investment in growth would be prudent. We’re only two weeks into the year, and while the guide came up a little short, management has plenty of options that could lead to upward revisions later in the year. The guidance also assumes that the $1.95 trillion asset cap that regulators imposed in 2018 because of past transgressions will remain in place through 2024. This is a more likely 2025 story than 2024. One strike against Wells Fargo compared to the second large bank is its higher exposure to loans for office real estate. Wells Fargo said it had begun to experience some losses in its commercial real estate portfolio due to weakness in that market, but reiterated that its real estate team “has a rigorous monitoring process and continues to de-risk and reduce exposure.” We are satisfied with the loan from Wells Fargo. Guidance With the fourth quarter in the books, we’re getting our first look at how companies see the business doing in 2024. Starting with net interest income, management noted that based on their assumptions (again, those five Fed rate cuts), NII could be around 7% to 9% lower than the $52.4 billion level reached in 2023, implying a range of $47.7 billion to $48.7 billion, missing the consensus estimate of $49.69 billion. The full-year spending estimate of roughly $52.6 billion appears to be slightly below expectations of $52.75 billion (which is positive) and down from the $53.6 billion level in 2023, excluding those FDIC charges. $2.7 billion of efficiency initiatives were included in this guide. The outlook is a bit below what we were looking for, with the NII forecast missing $1.46 billion on Wednesday, while the spending guide is just $150 million better than expected, for a net miss of about $1.34 billion. 4Q Segment Results Consumer Banking and Lending revenue rose nearly 1% year-over-year to $9.52 billion in the 4th quarter. Consumer and Small Business Banking (CSBB) revenues increased 1% year over year as higher interest rates were only partially offset by lower deposit balances. Housing loans increased by 7% compared to last year and stagnated year-on-year. Credit card revenues decreased by 1% year-on-year and by 2% sequentially. Auto loan revenue was down 19% year-over-year and 7% year-over-year. Personal loans were up 13% year-over-year and up 1% year-on-year. Commercial banking revenue rose 7% to $3.37 billion. Middle Market Banking revenues increased 6% year-over-year, while lending and asset leasing revenues increased 9% year-over-year Non-interest expenses increased 7% year-over-year as higher severance and operating expenses were only partially offset by the impact of initiatives aimed at efficiency. Costs increased sequentially by 6% due to increased severance costs. Corporate and investment banking revenue jumped 14% to $4.74 billion. Total banking revenues increased 15% year-on-year due to higher lending revenues and “higher investment banking revenues due to increased activity across all products.” Commercial real estate revenue increased 2% year over year due to higher rates, although this benefit was partially offset by a decline in loan and deposit balances. Market sales increased by 33% year-on-year. Non-interest expenses increased by 16% year-on-year due to higher operating expenses and staff costs (including severance pay). But, as in commercial banking, efficiency initiatives partially offset the increase. Income from wealth management and investments fell 1% to $3.66 billion. Net interest income fell 19% year-over-year due to a decline in deposits from customers who reallocated cash to higher-yielding securities, partially offset by higher rates. In the call, management particularly emphasized that deposits at the end of the period in property and investment management gradually increased for the first time in more than a year. Non-interest income increased 7% year-on-year due to higher asset charges due to higher market valuations. Non-interest expense increased 11% year-over-year due to higher revenue-related compensation and severance costs, again partially offset by efficiency initiatives. (Jim Cramer’s Charitable Trust is long WFC. See the full list of stocks here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim executes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in his charitable trust’s portfolio. If Jim was talking about stocks on CNBC TV, he waits 72 hours after the trade alert is issued before he executes the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO FIDUCIARY OBLIGATION SHALL EXIST OR CREATE BY YOUR ACCEPTANCE OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO PARTICULAR RESULT OR PROFIT IS GUARANTEED.
Wells Fargo CEO and President Charles Scharf testifies during a Wall Street oversight hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, DC, December 6, 2023.
Saul Loeb | AFP | Getty Images
Wells Fargo reported better-than-expected quarterly results before Friday’s opening bell. We were also pleased to see that by the end of 2023, management has officially delivered on its multi-year cost savings program of $10 billion. But shares came under pressure due to a weaker-than-expected outlook.