Wells Fargo's solid 4Q and planned share buybacks support our thesis for the stock, as shares climb

Published Fri, Jan 13 20232:58 PM ESTUpdated Wed, Mar 8 20232:02 PM EST

Wells Fargo (WFC) reported mixed fourth-quarter results on Friday. But the bank demonstrated a stellar bottom line, while committing to much-welcomed share buybacks in the current quarter. Total revenue fell 6% year-on-year, to $19.66 billion, missing analysts' expectations for $19.98 billion in revenue. Earnings-per-share of 67 cents exceeded estimates of 59 cents per share. Included in this figure was a 70-cent headwind resulting from legacy issues, another 15-cent hit due to equity impairment charges largely related to the venture capital business, and a 7-cent impact resulting from severance expenses in the home lending business . A partial offset to these negative factors was a 13 cent per share discrete tax benefit. Shares of Wells Fargo initially plummeted by as much as 5.5% earlier in the day before rebounding on comments from CEO Charles Scharf, who said the bank would spend carefully and become more efficient this year. Wells Fargo was trading up more than 3% Friday afternoon, at $44.20 a share. WFC 1D mountain Wells Fargo (WFC) 1 day performance Bottom line In line with our thesis, higher interest rates resulted in a significant increase in net interest income (NII) as the net interest margin – the spread between what the bank pays on deposits and charges on loans – continued to expand. Sequentially, the biggest driver was higher interest rates. Annually, the benefit from higher loan balances and lower mortgage-backed securities premium amortization. Unfortunately, this was partially offset by a decline in fee-based noninterest income, which was down on both a sequential- and annual basis. In addition to the solid bottom-line performance, we are highly encouraged to see that management will begin to buy back shares in the current quarter. Looking to the full year, while the net interest income forecast came in below expectations, the expense guidance excluding operating losses indicates an annual decline, welcome news given that peers are looking at higher expenses in 2023. Additionally, Scharf said Friday that while the bank has earmarked a good deal of money for additional investments in growth, they are by no means planning to spend those funds "at all costs." That commentary was welcome news to investors. Key company metrics Net interest income: $13.43 billion, up 11% quarter-over-quarter and 45% year-over-year, outpacing analysts' forecasts of $12.99 billi