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Wells Fargo Stock: Don’t Bank on These Weak Profits
Stock Analysis & Ideas

Wells Fargo Stock: Don’t Bank on These Weak Profits

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Some traders might be optimistic that Wells Fargo will ramp up its share buyback activity. However, the bank’s financial data doesn’t indicate that Wells Fargo will deliver for the shareholders.

I am neutral on Wells Fargo (WFC) stock. When it comes to Wells Fargo, there’s a good news/bad news situation. The company was among the big banks to kick off earnings season for 2022’s second quarter. As it turned out, Wells Fargo’s results revealed some serious problems for the company.

Wells Fargo is a large financial institution. Its business depends on a number of factors, including interest rates and the overall health of the economy. Lately, the Federal Reserve’s actions have both helped and hindered banks like Wells Fargo.

Don’t misunderstand, as there are still reasons to invest in Wells Fargo stock. Just be aware of the risks and Wells Fargo’s inability to deliver expectation-beating results. In the final analysis, you might decide to take a neutral position or at least keep your stock position in Wells Fargo small.

The Good News about Wells Fargo

Even the most staunch skeptics must admit that Wells Fargo stock looks like a pretty good value now. For one thing, the stock is trading at a steep discount to its 52-week high of $60.30. Meanwhile, Wells Fargo’s trailing 12-month P/E ratio is quite reasonable at just 9.86. On top of all that, investors can collect a healthy forward annual dividend yield of 2.43% by simply holding Wells Fargo shares.

There also seems to be some positive news from the Federal Reserve for big banks like Wells Fargo. The June consumer price index (CPI) print of 9.1% means that the Fed will almost certainly maintain an aggressive course of interest rate hikes throughout 2022, and possibly into 2023 as well. Otherwise, inflation could really get out of hand.

Wells Fargo and other large banks’ business models depend largely on collecting interest from loans. If interest rates are high, then conceivably, Wells Fargo should be able to charge higher rates for loans. As Wells Fargo CEO Charlie Scharf put it, rising interest rates drove “strong net interest income growth” during 2022’s second quarter. So, at least that’s a silver lining to the Fed’s rate hikes for Wells Fargo.

Meanwhile, according to CFO Mike Santomassimo, Wells Fargo plans to continue buying back shares of the company’s stock. This announcement follows on the heels of the Federal Reserve stress test results, which were recently published. If Wells Fargo is confident enough to maintain a policy of share repurchases, then this could be considered a positive sign for the company and for the U.S. banking sector in general.

Wells Fargo Struggles with Mortgage Weakness and Other Problems

On the other hand, the Fed’s interest rate hike could create issues for Wells Fargo. Let’s not forget that higher interest rates mean that banks will end up paying out more money on deposits, including in savings accounts.

Plus, high interest rates tend to inhibit borrowing and lending activity, the bread and butter of Wells Fargo’s business model. Moreover, this could slow down the flow of money through the U.S. economy, and an economic slowdown certainly wouldn’t help Wells Fargo.

Scharf admitted that Wells Fargo expects “credit losses to increase from these incredibly low levels.” Wells Fargo increased its provision (funds saved up) for credit losses by $580 million in Q2 of 2022. This is a sign that the company is probably concerned about people and businesses defaulting on their loans.

Similarly, investors should know that Wells Fargo struggled with mortgage segment weakness in Q2. Reportedly, mortgage loan originations were down 36% year-over-year. This, without a doubt, was a contributing factor as Wells Fargo’s non-interest income fell 40% to $6.8 billion.

All in all, Wells Fargo simply missed the mark in the company’s quarterly earnings data. Starting with the top-line results, Wall Street expected Wells Fargo to generate $17.5 billion in second-quarter revenue. The actual result, unfortunately, was $17 billion. This isn’t a huge miss, but it’s still short of what the experts had predicted. It’s also significantly less than the $20.3 billion in revenue that Wells Fargo reported in the year-earlier quarter.

Now turning to the bottom-line results, the analyst community had modeled 80 cents per share in Q2 2022 earnings for Wells Fargo. This was a low bar to clear, since the bank had earned $1.38 per share in the year-ago quarter. However, Wells Fargo couldn’t even measure up to the low expectations, as the company reported earnings of 74 cents per share.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, WFC is a Strong Buy, based on nine Buy and three Hold ratings. The average Wells Fargo price target is $52.75, implying 28.07% upside potential.

Be Cautious with Wells Fargo Stock

The Fed’s interest rate hikes seem to be creating problems for Wells Fargo. For instance, mortgage loan originations are down substantially, and that’s not going to help Wells Fargo at all.

So, you don’t have to be tempted by Wells Fargo’s dividend yield and the apparently good value in the shares. The circumstances are too challenging to invest in Wells Fargo stock now, so it makes sense to stay neutral for the time being.

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