What to Look for in Wells Fargo Earnings as Credit Loss Risk Grows

Wells Fargo report third quarter earnings before the bell Friday, last quarter $WFC earnings came in lower than expected with many of America’s largest money center banks. Analysts will be watching credit risk updates after the banks sharp drop in profits flowed from boosting its provision for credit losses by $580 million in the second quarter. Morgan Stanley recommends leaning into Wells Fargo along with M&T Bank (MTB), Regions Financial (RF) and First Republic Bank (FRC). Wells Fargo reminds us of its regulatory issues continue.

Bankers

Reporting also this week were JPMorgan Chase (JPM) PNC Bank (PNC), Morgan Stanley MS and Citibank (C) along with BlackRock (BLK).

Wells Fargo Earnings Preview

Q3 2022 earnings release at 7 a.m. ET; conference call at 10 a.m. ET

  • Projected EPS: $1.10
  • Projected revenue: $18.76 billion

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.

Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Higher rates increase margins

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

Wells Fargo Q2 2022 Recap

Q2 2022 earnings before the bell; conference call at 10 a.m. ET Friday

  • Wells Fargo reported an adjusted profit of 74 cents on $17 billion in revenue. In the year-ago quarter, Wells Fargo reported profit of $1.38 a share on $20.3 billion in revenue. WFC was expected to earn 80 cents a share on revenue of $17.5 billion.
  • Excluding an impairment of 8 cents a share for its venture capital business and other items, earnings were 82 cents a share in the latest quarter.
  • Profit in the latest second quarter totaled $3.1 billion, marking a 48% drop from the year-ago quarter.
  • Wells Fargo’s drop in second-quarter revenue was due in part to a slowdown in mortgage banking and the divestitures from 2021.
  • The sharp drop in profits was due to the bank boosting its provision for credit losses by $580 million in the second quarter vs. a $1.2 billion reserve release in the year ago quarter.
  • The bank saw a 16% increase in net interest income from the last year’s second quarter and net interest margin improved by 37 basis points.

“While our net income declined in the second quarter, our underlying results reflected our improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth,” Charles Scarf, chief executive at Wells Fargo, said in a statement.”

Cautions Remains

Investors remain cognizant that WFC has a multiyear effort to satisfy regulatory requirements, with setbacks likely to continue along the way. We saw this as Wells Fargo reported a $460 million increase in operating losses last quarter primarily driven by customer remediation expenses.

Scharf appeared appeared optimistic about the bank’s ability to navigate the challenging times.

“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,” he said.

The rise in interest rates with the Fed leads banks tol benefit from rising rates, provided that they don’t go up too rapidly and hurt demand for mortgages, credit cards and other loans.

There is that reputational risk hangs over the bank after a series of scandals that included creating fake customer accounts.

The brighter outlook for bank profits coincides with higher in Treasury yields. The benchmark 10-year Treasury yield has risen sharply the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  

Source: JPM, WFC, C, BLK,

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