Shares of Wells Fargo & Co. (NYSE:WFC) are down 3% in pre-market trading after the American multinational financial services company missed both revenue and earnings expectations for the second quarter of fiscal 2022.
The bank benefited from the rising interest rates by which it boosted its net interest income (NII). However, the same hawkish Fed policy deterred the company’s fee growth in its venture capital, mortgage banking, wealth management, and investment advisory businesses.
WFC CEO, Charlie Scharf, stated, “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. 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.”
Q2 Results in Detail
Wells Fargo reported Q2 diluted earnings of $0.74 per share, much lower than the analysts’ estimates of $0.83 per share.
Similarly, the banking giant failed to meet total revenue estimates by $510 million. Total revenue of $17.03 billion fell 16% year-over-year and declined 3% sequentially.
NII of $10.20 billion grew 16% year-over-year while the non-interest income of $6.83 billion fell a whopping 40% compared to the prior year’s quarter. Meanwhile, the provision for credit losses was $580 million (expense) compared to a release of reserves (benefit) of $1.26 billion in the comparative period.
Wall Street is Bullish on WFC
Ahead of the results, Evercore ISI analyst John Pancari reiterated a Buy rating on WFC stock while reducing the price target to $48 (23.9% upside potential) from $53.
Amid the ongoing macroeconomic headwinds, Pancari believes that “much of the negative news appears to have been flushed out over the past few weeks, and we are constructive on the name going into 2Q print especially given an attractive valuation (1.1x Price/Tangible Book Value).”
Despite the current uncertainty surrounding the banking sector, analysts are highly optimistic about WFC. The stock commands a Strong Buy consensus rating based on nine Buys and three Holds. The average Wells Fargo price target of $53 implies 36.8% upside potential to current levels. Meanwhile, the stock has lost 22.9% year to date.
As much expected, Wells Fargo has missed its Q2 expectations, following suit with the other “Big Four” bank JP Morgan’s (JPM) quarterly miss . Nonetheless, the multinational bank’s CEO shows conviction in “improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth,” while it continues to execute efficiency initiatives.
The current macroeconomic environment continues to play a mixed picture for the banking sector with rising interest rates benefiting NII and hurting non-interest income. Furthermore, the Federal Reserve’s stress test has confirmed that WFC has a strong capital position and is capable of increasing shareholder returns in the form of dividends and stock buybacks. Meanwhile, the bank continues to undertake steps to strengthen its loan and deposit balances and consumer card portfolios.