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Wells Fargo announced better-than-expected quarterly results before Friday’s opening bell. We are also pleased that management has formally executed on his $10 billion multi-year cost reduction program as of the end of 2023. However, the stock came under pressure following weaker-than-expected guidance. Total sales for the three months ended Dec. 30 rose more than 2% from a year earlier to $20.48 billion, LSEG said, beating analysts’ expectations of $20.3 billion. Adjusted earnings per share were $1.29, beating Wall Street’s consensus estimate of $1.17 per share, according to LSEG data. However, several one-time items impacted EPS for the quarter. The 40-cent charge related to the Federal Deposit Insurance Corporation’s (FDIC) fourth-quarter special assessment of large banks was the cost of bailing out local banks after last year’s Silicon Valley Bank collapse. 20 cents severance pay. and a separate tax benefit of 17 cents. We do not compare item-adjusted earnings of $0.86 to estimates because the consensus does not take these special items into account. WFC 1Y Mountain Wells Fargo 1 Year Still, Wells Fargo stock fell more than 3.5% as the bank warned that its net interest income (NII) in 2024 could fall year over year. Conclusion Although the results were a bit noisy, they were significantly better than expected considering the one-time costs. Revenues exceeded expectations with both net interest and non-interest income strong in the fourth quarter. Core earnings performance, after adjusting for one-time factors, exceeded expectations, as did several key operating metrics that are important to specific book values and the bank’s valuation multiples at year-end 2023. Expenses that impacted revenue also factor in the underachievement seen in efficiency ratios, non-interest expenses, and return on tangible common capital (ROTCE) lines. Other than that, it exceeded my expectations. ROTCE in the fourth quarter was 13.4%, better than expected, and management continues to see “an achievable path to a sustainable ROTCE of 15% over the medium term.” Additionally, the charges described above added $2.28 billion to the non-interest expense line. Therefore, the results were also better than expected on a core basis (approximately $13.51 billion). Using this core non-interest expense figure, we can calculate the core efficiency ratio (non-interest expense divided by total revenue), which is approximately 66%, which is better than expected. Ultimately, these three key operating metrics on a core basis, which long-term investors should care about, were better than the reported results appear to indicate. Wells Fargo’s Common Equity Tier 1 (CET1) ratio also exceeded expectations. This is an important metric to note, especially ahead of expected increases in capital requirements from global regulators. The CET1 ratio highlights the bank’s ability to continue to support the return of cash to shareholders like us. To achieve this objective, management returned his $2.4 billion to shareholders through the repurchase of his 51.7 million shares in the fourth quarter, and in the last three months of 2023 he Paid a common stock dividend of 35 cents. , must admit that management’s 2024 outlook is weaker than the Street was expecting. But we’re not too worried, and it certainly doesn’t change our outlook for the stock in 2024. In fact, Wells Fargo’s level of about $45 per share is a buying opportunity, Jim Cramer said Friday at the club’s morning meeting. ROTCE is an important metric for investors to consider when determining the appropriate multiple to place on a bank’s tangible book value. The stock currently trades at around 1.2x, but he believes the stock could trade at a multiple closer to 1.5x if ROTCE can move toward its 15% target. This amounts to just under 1.5x based on the specific book value as of the end of 2023. $59 per share. This is before taking into account the specific increase in book value resulting from improved ROTCE rates. That being said, we still have work to do to get there, and as a result, we reiterate our 1 rating and $54 price target. It is important to note that bank guidance generally depends on interest rates, and companies such as Wells Fargo have little or no control over interest rates. Timing is also important. In this case, management assumes that five rate cuts by the Federal Reserve will impact the 2024 NII outlook. Lower interest rates mean less money for traditional financial institutions like Wells Fargo. With fewer layoffs, Wells Fargo’s NII could be higher than management expected. Wells Fargo’s guidance is based on the market’s forward rate curve as of Jan. 5, which puts the average federal funds rate in the fourth quarter of 2024 at 4.16%. This means about five cuts of 0.25 percentage points. If the Fed ultimately doesn’t cut rates as aggressively as the curve suggests, that could mean an upside to Wells Fargo’s NII forecast. Explaining what this difference is, management explained on the conference call that current interest rate sensitivity means that every 100 basis point change in interest rates can have a multi-billion dollar impact on NII. . We believe the downside risk (meaning five or more Fed rate cuts) is limited given Thursday’s higher-than-expected December consumer price index, but as always, It will depend on the data. Additionally, the $2.7 billion guidance in planned efficiency initiatives is fully dependent on increased technology and capital costs, expected credit increases, and other growth investments that may be delayed as needed. We expect there to be some areas where management will reduce expenses as needed, as there will be an offset. If there is another rate cut, it probably means the economy is not very hot, so it would be wise to hold back on growth investments. We’re only two weeks into the year, so this guide was a little short, but management has plenty of choices that could lead to upward revisions as the year progresses. The guidance also assumes that the $1.95 trillion asset cap imposed by regulators in 2018 due to past misconduct will remain in place through 2024. This is more likely to be about 2025 than 2024. This is because banks have high exposure to office real estate loans. Wells Fargo said the market downturn has begun to incur some losses on its commercial real estate office portfolio, but its real estate team has “rigorous monitoring processes and continues to work to avoid risk and reduce exposure.” “We are working on it,” he reiterated. We remain pleased with Wells Fargo’s loan book. As the fourth quarter of guidance begins, we begin to see how companies see his business going in 2024. Starting with net interest income, management noted that based on their assumptions (again, his five rate cuts by the Fed), NII could be around 2024. 7% to 9% lower than the $52.4 billion level achieved in 2023, implying a range of $47.7 billion to $48.7 billion, a margin of error compared to the published consensus forecast of $49.69 billion. There is. The full-year expense outlook is approximately $52.6 billion, which appears to be slightly lower than the $52.75 billion expected (which is positive) and down from the $53.6 billion level in 2023, excluding FDIC charges. . The guide includes $2.7 billion in efficiency initiatives. NII’s forecast is $1.46 billion short at the midpoint, while the expense guide is only about $150 million better than expected, resulting in a net error of about $1.34 billion. Therefore, the outlook is slightly below what we were looking for. Fourth Quarter Segment Results Fourth quarter consumer banking and lending revenues increased nearly 1% year over year to $9.52 billion. Consumer and Small Business Banking (CSBB) revenues increased 1% year over year as tailwinds from higher interest rates were only partially offset by lower deposit balances. Housing loans increased 7% year-on-year and remained flat from the previous quarter. Credit card revenue was down 1% for the year and 2% on a quarterly basis. Auto loan revenue was down 19% year-over-year and 7% sequentially. Personal loans grew 13% year-over-year and 1% last quarter. Commercial banking revenue rose 7% to $3.37 billion. Middle market bank revenues increased 6% year-over-year, with asset-based lending and leasing revenues increasing 9% annually. Non-interest expenses increased 7% compared to the prior year, with higher severance and operating costs only partially offsetting non-interest expenses. The impact of efficiency efforts. Expenses increased 6% sequentially due to increased severance payments. Corporate and investment banking revenue increased 14% to $4.74 billion. Total banking revenues increased 15% year-over-year due to higher loan revenues and “increased investment banking revenues due to increased activity across all products.” Commercial real estate revenue increased 2% year-over-year due to higher interest rates, a benefit partially offset by lower loan and deposit balances. Market revenue increased 33% year over year. Non-interest expenses increased 16% for the year due to higher operating costs and personnel expenses (including severance benefits). However, as with commercial banks, efficiency efforts partially offset the increase. Wealth and investment management revenue decreased 1% to $3.66 billion. NII decreased 19% year over year due to lower deposits from customers reallocating cash to higher yield securities, partially offset by higher interest rates. Specifically, management highlighted during the conference call that end-of-period deposits in the Wealth and Investment Management segment increased quarter-over-quarter for the first time in more than a year. Non-interest income increased 7% year over year as a result of higher asset-based fees due to higher market valuations. Noninterest expenses increased 11% for the year due to higher revenue-related compensation and severance benefits, partially offset by efficiency efforts. (Jim Cramer’s Charitable Trust is a long WFC. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. I will receive it. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in a charitable trust’s portfolio. If Jim talks about a stock on his CNBC TV, he will wait 72 hours before executing the trade after issuing a trade alert. 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Wells Fargo CEO and President Charles Scharf testifies during the Senate Banking, Housing and Urban Affairs Committee’s Wall Street Oversight Hearing on December 6, 2023 at the Capitol in Washington, DC.
Saul Loeb | AFP | Getty Images
wells fargo announced better-than-expected quarterly results before Friday’s opening bell. We are also pleased that management has formally executed on his $10 billion multi-year cost reduction program as of the end of 2023. However, the stock came under pressure following weaker-than-expected guidance.
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