Wells Fargo Earnings: Shares Tumble 6% on Updated Expense Guidance

Key Morningstar Metrics for Wells Fargo

• Fair Value Estimate: $58.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Wells Fargo’s Earnings

Wells Fargo WFC reported second-quarter earnings of $1.33 per share, compared with $1.25 per share in the year-ago quarter. Shares tumbled around 6% on the news of the bank’s updated 2024 expense guidance, which was a slight disappointment, given the importance of controlling expenses. Trading revenue came in quite strong at $1.4 billion, a near-all-time high. The numbers resulted in a return on tangible equity of 13.7%, below management’s medium-term target of 15.0%. We do not plan to materially change our $58 fair value estimate for Wells Fargo as we fully incorporate these results.

Wells Fargo’s full-year 2024 net interest income guidance was changed to 8%-9% lower (previous guidance was 7%-9% lower) than the full-year 2023 level of $52.4 billion, driven by loan balance declines and higher funding costs. Management still believes the bank will likely see a trough of NII toward the end of 2024. In our opinion, the bank is not likely to see material growth in NII for a couple of years even beyond 2024, given the asset sensitivity of its balance sheet. We project that NII will grow materially only after the current rate-cutting cycle fully plays out. The counter-argument is that loan growth should help offset net interest margin compression in the upcoming years. We think this is possible but unlikely, given the lackluster demand for loans in the economy.

The bank now expects 2024 expenses of $54 billion (including $336 million in FDIC charges and higher operating losses), 2.7% higher than the previous guidance of $52.6 billion. This increase was mainly driven by higher revenue-related compensation and higher operating losses. We expect operating losses to remain a lingering factor until regulatory issues are resolved.