Wells Fargo follows a solid quarter, promising investors something many of them count on

Published Fri, Jul 14 20231:38 PM EDT

Don't let Friday's stock action fool you: Wells Fargo (WFC) had a very good quarter. The bank reported second-quarter results on Friday that exceeded Wall Street's estimates. It also showed off strong underlying fundamentals and a capital position that can support further cash returns to shareholders — a big plus for investors like us. Total revenue advanced over 20% year-on-year to $20.53 billion, exceeding analyst expectations for $20.12 billion, according to estimates compiled by Refinitiv. Earnings-per-share (EPS) of $1.25 also came in above the consensus estimate of $1.16 per share, Refinitiv data showed. Shares of Wells Fargo initially climbed more than 2% following the earnings release, before giving up some of those gains. Wells Fargo stock was trading up slightly and down slightly Friday afternoon. WFC YTD mountain Wells Fargo YTD performance Bottom line It was very good quarter for Wells Fargo as the better-than-expected headline results came on the back of a lower-than-expected efficiency ratio, and slightly higher-than-expected net interest margin (NIM). As a result, both net interest income (NII) and non-interest income outpaced expectations. Return on tangible equity was also better than expected and demonstrated significant improvement over the year-ago period. Less positive, we did see a 30 basis increase in deposit costs versus the first quarter due to higher interest rates. This was reflected by a slight contraction we saw sequentially in NIM — the percentage difference between what a bank pays account holders and the money it makes from lending money. While the team did cite higher-yielding alternatives as a key source of competition for deposits, it also noted the pace of "outflows into cash alternatives slowed in the second quarter." Wells Fargo's CET1 (common equity tier 1) ratio was in line with expectations. However, management said on the call that the Federal Reserve's recent stress test revealed a strong capital position with its CET1 ratio 1.5 percentage points above the bank's current minimum and 1.8 percentage points above where the minimum level will move to later this year, in the fourth quarter. In line with this strength, management was able to return $4 billion to shareholders via the repurchase of just over 100 million shares during the second quarter and announce an increase to the dividend payout in the third quarter to 35 cents per share — up from 30 cents per share. On the call, the team said, "The stress test results demonstrated that we have the capacity to continue to repurchase common stock." Management was also quick to remind investors that they "expect our capital requirements will increase." Any regulatory changes are expected to be phased in gradually over several years, and the team sees that approach as manageable, considering the "amount of our future repurchases." Ultimately, the solid quarter demonstrates that the bank continues to make progress in becoming more efficient. Though the likelihood of higher capital requirements is an overhang, especially given that we can't yet quantify the impact, the bank clearly has the capacity to hold onto more capital as needed while keeping its commitment to shareholder returns via dividends and buybacks. As a result, we reiterate our 1 rating on the stock . Our other financial holding, Morgan Stanley (MS) reports its quarter Tuesday. 2023 outlook Wells Fargo raised its full-year 2023 forecast for NII, now expecting it to be up roughly 14% higher in 2023 than the $45 billion seen in 2022, implying a result of roughly $51.3 billion. That's up from the roughly 10% increase that the bank had forecast previously. On the other hand, Wells also raised its non-interest expenses guidance for 2023, to about $51 billion, up from the prior target of approximately $50.2 billion. On the call, the team said, "The increase includes higher severance expense due to actions we have taken, and plan to take in 2023, as attrition has been slower than expected." Companywide Q2 results In segment results, consumer banking and lending revenue rose 11% to $9.46 billion. In that unit, consumer and small business banking (CSBB) revenue increased 19% year-over-year and 1% sequentially. Higher rates were only partially offset by lower deposits and a reduction in deposit-related fees that reflects the bank's efforts to "help customers avoid overdraft fees." Drilling down further, home lending was down 13% from last year but down only 2% sequentially. Credit card revenue increased 1% annually and on a sequential basis. Auto loan revenue was down 13% year-over-year but down only 4% sequentially. Personal lending increased 17% from last year, up 5% sequentially. Commercial banking revenue increased 35% to $3.37 billion. In that category, middle market banking revenue increased 51% 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 13% annually thanks primarily to loan growth. Noninterest expenses increased 10% 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 revenue jumped nearly 30% to $4.63 billion. Total banking revenues increased 37% year-over-year, a result of higher rates and lending revenues. Commercial real estate revenue increased 26% year-over-year due to higher rates and loan balances. Markets revenue was up 29% year-over-year, driven by higher trading revenues across several asset classes. Non-interest expenses increased 13% 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 revenue slipped 1.5% to $3.65 billion. NII increased 10% year-over-year, due to higher rates. However, that figure was partially offset by a decline in deposits from customers reallocating cash into higher-yielding securities. Importantly, on the call, the team said that "outflows into cash alternatives slowed in the second quarter." Non-interest income fell 5% year-over-year, a result of lower asset-based fees driven by a decline in market valuations. Non-interest expenses were up 2% annually due to an increase in operating costs, though partially offset by lower revenue-related compensation and efficiency initiatives. (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.

Charlie Scharf, CEO, Wells Fargo, speaks during the Milken Institute Global Conference in Beverly Hills, California on May 2, 2023. speaks during the Milken Institute Global Conference in Beverly Hills, California on May 2, 2023.

Patrick T. Fallon | Afp | Getty Images