Wells Fargo Stock Continues its Outperformance despite Mixed Earnings

Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.

Last week, JPMorgan, Citigroup, Morgan Stanley, and Wells Fargo reported their second-quarter earnings. It was a mixed earnings season but Citigroup stands out as the company topped both topline and bottomline estimates. JPMorgan on the other hand missed both the sales and revenues estimates and the stock slumped after the earnings release.

Wells Fargo posted mixed results. While it missed sales estimates, its profits came in higher than what analysts were expecting. The stock closed in the green after the earnings release and continues to outperform banking peers as well as the S&P 500 in a tough market.

Key takeaways from Wells Fargo Q2 earnings

Wells Fargo posted revenues of $17.03 billion which were lower than the $17.53 billion that analysts were expecting. The revenues fell 16% from the corresponding period last year. Notably, like fellow US banks, Wells Fargo reported higher net interest income. In a rising rate environment, as we are currently in, banks make higher interest margins. However, Wells Fargo’s non-interest income slumped 40% to $6.83 billion in the quarter and more than offset the increase in interest income.

Wells Fargo CEO Charlie Scharf commented on the earnings, “While our net income declined in the second quarter, our underlying results reflected our improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth. Loan balances increased with growth in both consumer and commercial loans. Credit quality remained strong, and we continued to execute on our efficiency initiatives.”

Credit losses swell

During the quarter, Wells Fargo made a $580 million provision for credit losses. Other banks have also made provisions for potential delinquencies amid the slowdown in the US economy. Also, Wells Fargo took a $576 million charge towards its venture capital investments. There has been a sharp correction in the valuation of startup companies and recently Klarna took an 85% hit to its valuation.

Wells Fargo’s mortgage business has been negatively impacted by rising mortgage rates. In the second quarter of 2022, its home lending was down 53% as compared to the corresponding period last year. Mortgage originations have fallen this year as average mortgage rates have doubled. The refinance market has been even weak amid multi-year high mortgage rates.

Commenting on the mortgage industry, Mike Santomassimo, Wells Fargo CFO said “It’ll be a challenging market in the mortgage business for the next couple of quarters as things start to stabilize and we see where the path of rates will go.”

Scharf on the business outlook for the bank

During the second quarter, Wells Fargo had a CET1 ratio of 10.3% as compared to 12.1% in the second quarter of 2021.

Commenting on the outlook, Scharf said, “Looking ahead, our results should continue to benefit from the rising interest rate environment with growth in net interest income expected to more than offset any further near-term pressure on noninterest income.” There are concerns that credit losses could swell significantly amid the deteriorating economic conditions.

JPMorgan particularly gave a grim commentary on the economy. The bank’s CEO Jamie Dimon had warned of an economic “hurricane” previously also. Meanwhile, Scharf wasn’t as bearish on the outlook and said, “We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios.”

Wall Street analysts are bullish on Wells Fargo stock

Warren Buffett has fully exited Wells Fargo and has added Citigroup to the portfolio this year. Meanwhile, Wall Street has a divergent view and most analysts see Wells Fargo as a buy while many analysts have downgraded Citigroup stock.

In the past, Wells Fargo has been involved in several controversies. However, most analysts believe that it is among the best-placed banks amid rising interest rates. US interest rates have spiked this year and the Fed has raised rates thrice so far. The US Central Bank is expected to raise rates by up to 100 basis points at its July meeting as well.

About Mohit PRO INVESTOR

Mohit Oberoi is a freelance finance writer based in India. He has completed his MBA in finance as a major. He has over 15 years of experience in financial markets. He has been writing extensively on global markets for the last eight years and has written over 7,500 articles. He covers metals, electric vehicles, asset managers, tech stocks, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.