Wells Fargo stumbled this quarter, but our investment thesis on the bank remains intact

Published Thu, Apr 14 20222:08 PM EDT

Wells Fargo (WFC) reported disappointing first-quarter results before the opening bell Thursday. Total revenue of $17.59 billion, a decrease of 5% year-over-year, missed the FactSet consensus estimate of $17.80 billion. And adjusted earnings per share of $0.88, down 13.7%, beat estimates of $0.80. Bottom line This wasn't the expected result since we believed Wells Fargo could have been a standout this quarter. After all, the bank is a major beneficiary of higher interest rates, lower expenses, and zero foreign exposure. We are disappointed by the outcome and the negative price action today, but with the core parts of our investment thesis intact (rates going higher, expenses lower) and the elusive asset cap removal still out there, we view today's weakness as a buying opportunity. Key company metrics Before digging into the various operating segments, let's take a quick look at some key overall metrics: Net interest income: $9.221 billion (up 5% year-over-year) vs. $9.288 billion expected Net interest margin: 2.16% vs. 2.12% Non-interest income: $8.371 billion vs. $8.541 billion Non-interest expense: $13.870 billion (down 1% year-over-year but up 5% over last quarter) vs. $13.159 billion. A very disappointing result because one of the main reasons to own WFC is for its expense reduction program, but it comes with a caveat. The year-over-year increase included a $460 million increase in operating losses primarily driven by customer remediation expenses. ROTCE: 10% Efficiency ratio: 79% vs. 73.8% expected…this was too bloated for our taste Common equity tier 1 (CET1) capital ratio: 10.5%, down from 11.4% last quarter (due to strong capital returns and $5.1 billion reduction in cumulative other comprehensive income, among other reasons) but well above the regulatory minimum of 9.1% Period-End Loans: $911.8 billion (up 6% year-over-year, 2% increase over last quarter) vs. $892.703 billion. Third consecutive quarter of loan growth Average deposits: $1.464 trillion (5% increase) vs. $1.479 trillion Tangible book value per share (TBVPS): $35.13 vs. $36.49 expected Segment results Consumer Banking and Lending total revenue was $8.563 billion, down 1% over last year and down 2% over last quarter. Consumer and small business banking (CSBB) revenue increased 11% year-over-year primarily due to higher deposit balances, higher deposit-related fees, and an increase in debit card transaction volumes, partially offset by lower revenue from PPP loans. Within consumer lending, home lending was down 33% over last year but up 19% over last quarter. Credit card revenue increased 6% over last year, auto rose 10%, and personal lending was up slightly. Commercial Banking total revenue was $2.327 billion, up 12% year-over-year and up 2% over last quarter. Middle market banking revenue of $1.246 billion represented an increase of 8% over the same period last year on higher deposit and loan balances as well as the impact of higher rates. Asset-based lending and leasing revenue of $1.081 billion increased 17% year-over-year driven by higher loan balances, stronger net gains from equity securities (a headwind quarter-over-quarter), and higher revenue from renewable energy investments. Corporate and Investment Banking total revenue was $3.470 billion, down 4% year-over-year and down 1% over last quarter. Total banking revenues increased 4% year-over-year but down 5% from last quarter on lower investment banking fees resulting from lower market activity, improved Treasury management results and higher loan balances. Commercial real estate revenue increased 9% year-over-year on higher loan balances and higher revenue in the low-income housing business, partially offset by lower commercial mortgage-backed securities gain on sale margins and volumes. Markets revenue was down 18% but increased 16% from last year driven by higher trading activity across equity products and FICC. Wealth and Investment Banking total revenue was $3.757 billion, up 6% year-over-year. Net Interest Income increased 22% year-over-year thanks to higher interest rates as well as deposit and loan balances. Non-Interest Income grew 2% on higher asset-based fees primarily due to higher market valuations, partially offset by lower activity. Outlook for rest of 2022 One of the main reasons why we have invested in Wells Fargo is for its expense reduction outlook, so it was worrying at first to see the bank posted a much larger-than-expected expense result in the first quarter. That line item was one of the main reasons why WFC initially fell roughly 6% at the start of trading. But as we always say, you cannot trade a stock before listening to the earnings call because when management provided its view on the full year 2022, they put to ease some of the concerns about expenses this year. After management reiterated that full year 2022 expenses are still expected to be approximately $51.5 billion, we were able to take a deep breath as it backed up our view that management's efficiency initiatives will drive expenses lower. On net interest income, management said on the call this will increase somewhere in the mid-teens year-over-year — a big improvement from the 8% increase they initially set in January, thanks to loan growth and the big move in rates. Regarding the asset cap, management reiterated its view that they continue to make progress, but "setbacks" are to be expected from time to time. Although the timing of the asset cap lift remains uncertain, we believe it will happen at some point, creating a catalyst for the stock because the removal should lead to more deposit growth, stronger ROTCE performance, and a stock re-rating. Capital returns Wells Fargo repurchased a staggering 110.1 million shares of common stock, or $6 billion, in the quarter, reducing its share outstanding count by 2% from the fourth quarter. That brings Wells Fargo's total repurchases since the third quarter of 2021 to $18.3 billion. Although the bank has plenty of flexibility under its stress capital framework to buy back more stock, management said on the call today to expect "significantly lower levels" of buyback activity in the second quarter. (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. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Wells Fargo (WFC) reported disappointing first-quarter results before the opening bell Thursday.

Total revenue of $17.59 billion, a decrease of 5% year-over-year, missed the FactSet consensus estimate of $17.80 billion. And adjusted earnings per share of $0.88, down 13.7%, beat estimates of $0.80.

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