Wells Fargo gives up gains despite earnings beat. We see a buying opportunity

Published Fri, Apr 14 20231:54 PM EDTUpdated Fri, Apr 14 20232:11 PM EDT

Wells Fargo (WFC) reported better-than-expected first-quarter results on Friday, demonstrating its underlying fundamentals are strong. And the subsequent drop in share price is simply an opportunity for investors to buy up the stock. Total revenue advanced 17% year-on-year, to $20.73 billion, exceeding analysts' expectations for $20.08 billion, according to estimates compiled by Refinitiv. Earnings-per-share of $1.23 came in well above the consensus estimate of $1.13 per share, Refinitiv data showed. Shares of Wells Fargo initially climbed more than 2% following the earnings release, before giving up most of those gains. Wells Fargo stock was trading down around 0.2% Friday afternoon, at $39.58 a share. Bottom line Though deposits and loans came in below expectations, those misses were more than offset by better-than-expected results on the net interest margin — which continued to benefit from higher interest rates — and return on tangible common equity and efficiency ratios. The bank's common equity tier-1 ratio (CET1) improved on both a sequential and annual basis, supporting the repurchase of $4 billion worth of stock in the first quarter. Given the bank's CET1 ratio remains comfortably above the regulatory minimum – and its liquidity coverage ratio is 22% above the regulatory minimum – the bank is sufficiently well-capitalized to pay out further cash returns to shareholders. Wells Fargo said it saw some benefit from deposit inflows in the wake of the collapse of Silicon Valley Bank (SVB) last month, but added that those have since abated. Wells Fargo management also noted that, like many other regional banks, it has a much broader business model and more diversified sources of funding than a bank like SVB. Meanwhile, consumer spending was strong through most of the first quarter, according to Wells Fargo management, with growth in both credit and debit usage, before softening in the latter part of the three months ended March 31. Despite an increase in provisions for credit losses, most of the bank's business areas remain strong with little change in trends seen in the prior quarter and no meaningful update to its economic outlook. Still, management said it's carefully monitoring any potential deterioration in asset classes or customer segments, noting that the commercial real estate market is under pressure. The bank has accordingly tightened lending standards on high-risk areas of that market. Looking ahead, Wells Fargo reiterated its guidance for net interest income (NII) and non-interest expenses for 2023 — welcomed news given the uncertainty that's arisen in the banking sector since that guidance was first provided. That management was not forced to trim its outlook in the current environment is also a sign the guidance was conservative from the start. This quarter goes to show that the underlying fundamentals of Wells Fargo are strong, and only getting better as management continues to execute on cost-saving initiatives and works to resolve outstanding regulatory challenges. Ultimately, we find the stock decline on this report to be unwarranted and believe it represents a buying opportunity. Segment details Consumer banking and lending Consumer and small business banking (CSBB) revenue increased 28% year-over-year, as higher rates were only partially offset by lower deposits. Within consumer lending, home lending was down 42% from last year, while credit card revenue increased 3% annually. Auto loan revenue was down 12% year-over-year and personal lending increased 9% from last year. Commercial banking Middle market banking revenue increased 73% year-over-year, as higher interest rates and loan balances were only partially offset by lower deposits. Asset-based lending and leasing revenue was up 7% annually, as loan growth was partially offset by lower net gains from equities. Noninterest expenses increased 14% year-over-year, primarily due to higher personnel expenses and operating costs — though, efficiency initiatives served to partially offset the increase. Corporate and investment banking Total banking revenues increased 37% year-over-year, a result of higher interest rates and lending revenue on higher loan balances. Investment banking fees were down, given lower market activity. Commercial real estate revenue increased 32% year-over-year, due to higher interest rates and loan balances. Markets revenue was up 53% year-over-year, driven by higher trading revenue across all asset classes. Non-interest expenses increased 12% annually, due to higher operating costs and personnel expenses. But, as in commercial banking, efficiency initiatives served to partially offset the increase. Wealth and investment management Net interest income jumped 31% year-over-year, due to higher interest rates. But that figure was partially offset by a decline in deposits from customers reallocating cash into higher yielding securities. Non-interest income, however, fell 11% year-over-year, a result of lower asset-based fees driven by a decline in market valuations. Non-interest expenses fell 4% annually, primarily due to lower revenue-related compensation and efficiency initiatives. 2023 outlook Wells Fargo maintained its full year 2023 forecast for NII to be roughly 10% higher in 2023 than the $45 billion seen in 2022, implying a result of roughly $49.5 billion. The bank also reiterated its non-interest expenses guidance for 2023, at about $50.2 billion. That represents a roughly $100 million decrease on 2022 expenses (excluding the impact of $7 billion in operating losses in 2022 and an expectation for $1.3 billion in "ongoing business-related operating losses in 2023"). It remains a welcomed target, given many competitors' plans for higher expenses in 2023. (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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