Wells Fargo ‘s (WFC) stronger-than-expected third-quarter results and raised guidance on Friday prompted us to reaffirm our buy rating on the stock, as shares soared on the news. Total revenue for the three months ended Sept. 30 advanced over 6.6% year-on-year, to $20.86 billion, exceeding analysts’ expectations for $20.12 billion, according to Refinitiv. Earnings-per-share (EPS) of $1.39 came in above Wall Street’s consensus estimate of $1.24 per share, Refinitiv data showed. The $1.39-per-share figure excludes a 9-cent earnings benefit resulting from tax matters from the prior reporting period. Shares of Wells Fargo jumped more than 3% in midday trading Friday, to roughly $41 apiece. Bottom line Wells Fargo’s quarterly revenue outpaced expectations on the back of better-than-expected results for both net interest income (NII) and non-interest income. Moreover, earnings surged thanks to a decline in non-interest expenses, even if they came in slightly higher than we would have liked. Expense control is a significant reason why we’ve preferred Wells Fargo over some of the other big banks. One of management’s main goals is to improve efficiency, whether it be through reducing head count or optimizing parts of the business. Although management was hesitant to provide specific guidance expenses for 2024, we were encouraged to hear the bank is on track with its $10 billion multiyear cost-savings program. Compounding the headline beat was strong performance on several key operating metrics including the efficiency ratio, net interest margin, and return on tangible common equity. The tangible book value was a bit lighter than expected, but was still up over 9% year-over-year. The bank also had to increase it’s allowance for credit losses as a result of commercial real estate office loans and higher credit card loan balances, though the increase was less than expected. The firm’s common equity tier-one ratio (CET1) also came in ahead of expectations. This is a key metric to be aware of – especially ahead of an expected increase in capital requirements from global regulators – as it highlights the bank’s ability to continue supporting cash returns to shareholders like us. To that end, management returned $1.5 billion to shareholders via the repurchase of 33.8 million shares, and paid out a common stock dividend of 35 cents per share during the quarter, up 17% from the second quarter’s payout. Regarding the upcoming capital requirement increase, known as the Basel III framework, CEO Charlie Scharf said: “Fortunately, we’ve come into this from a strong position as our current capital levels are above the estimated regulatory minimum plus buffers. However, we still need to decide how much of an additional buffer we went to maintain…At this point we still see a path to currently increase our level of CET1 as appropriate, increasing our dividend and repurchasing common stock.” Management also noted Friday that $32.2 billion of the loans on the bank’s balance sheet (about 3% of total loans outstanding) were office loans, down 3% sequentially as “vacancy rates continue to be high”. The office market remains the weakest part of commercial real estate, and the bank said it remains committed to monitoring and de-risking its portfolio. Taken together, Wells Fargo delivered a stellar quarter that’s hopefully a sign of things to come as we kick off third-quarter earnings season. As a result we reiterate our 1 rating on the stock — meaning we would be buyers here — and a $50-per-share price target. 2023 outlook Wells Fargo raised its full-year 2023 forecast for NII and now expects it to be up roughly 16% in 2023, at roughly $52.2 billion, compared with $45 billion in 2022. The NII guidance is up from the roughly 14% increase the bank had previously forecast and above the $51.68 billion figure Wall Street predicted. On the other hand, Wells Fargo raised its non-interest expenses guidance for 2023, to about $51.5 billion, up from a prior target of roughly $51 billion but below analysts’ expectations for $52.5 billion. Notably, the two-percentage-point increase to the NII guidance amounts to an additional $900 million, which more than exceeds the $500 million expenses increase, resulting in a net positive. “Looking ahead, the U.S. economy has continued to be resilient with key support from [the] labor market and strength in consumer spending,” Scharf said Friday. But he added that he expects the economy to continue to slow, citing “significant uncertainty ahead.” Companywide results Segment results Consumer banking and lending revenue rose 3.3%, to $9.58 billion. Consumer-and-small-business banking (CSBB) revenue increased 7% year-over-year and 1% sequentially. Higher interest rates were only partially offset by lower deposits and a reduction in deposit-related fees that reflect the bank’s efforts to “help customers avoid overdraft fees.” Home lending was down 14% from last year but down only 1% sequentially. Credit card revenue increased 2% annually and 4% on a sequential basis. Auto loan revenue was down 15% year-over-year and down 5% sequentially. Personal lending increased 14% from last year and was up 2% sequentially. Commercial banking revenue increased 15%, to $3.41 billion. Middle-market banking revenue increased 23% year-over-year, as higher interest rates and loan balances were only partially offset by lower deposits. Asset-based lending and leasing revenue was up 3% annually, a result of loan growth and increased revenue from renewable energy investments. Non-interest expenses increased 1% year-over-year but fell 5% sequentially. The annual increase came as a result of higher personnel expenses and operating costs — though, efficiency initiatives served to partially offset the increase. Corporate and investment banking revenue jumped over 21%, to $4.92 billion. Total banking revenues increased 20% year-over-year, a result of higher rates and lending revenues, along with “higher investment banking revenue on increased activity across all products.” Commercial real estate revenue increased 14% year-over-year, due to higher rates and revenue growth in the firm’s low-income housing business. Markets revenue was up 33% year-over-year, driven by structured products, equities, credit products, and foreign exchange. The increase was partially offset by reduced trading activity in rates products. Non-interest expenses increased 15% annually, due to higher operating costs and personnel expenses. But, as was the case in commercial banking, efficiency initiatives partially offset the increase. Wealth and investment management revenue advanced 1%, to $3.7 billion. NII fell 7% year-over-year, due to a decline in deposits from customers reallocating cash into higher-yielding securities, partially offset by higher rates. Non-interest income increased 5% year-over-year, a result of higher asset-based fees driven by an increase in market valuations. Non-interest expenses were up 8% annually on higher revenue-related compensation and operating costs, but were also partially offset by efficiency measures. (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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A customer uses an ATM at a Wells Fargo Bank on April 14, 2023 in San Bruno, California.
Justin Sullivan | Getty Images
Wells Fargo‘s (WFC) stronger-than-expected third-quarter results and raised guidance on Friday prompted us to reaffirm our buy rating on the stock, as shares soared on the news.