Wells Fargo Stock To Beat The Consensus In Q1?

Wells Fargo (NYSE: WFC) is scheduled to report its fiscal Q1 2022 results on Thursday, April 14, 2022. We expect Wells Fargo to beat the consensus estimates for revenues and earnings. The bank posted better than expected results in the last quarter, with total revenues increasing 13% y-o-y. It was mainly driven by a 135% jump in the corporate segment, followed by a 10% growth in the commercial banking revenues, and a 6% rise in wealth & investment management. Further, the net interest income slightly decreased in the quarter. Notably, the unusual rise in corporate division revenues was due to a one-time gain from the sale of the Corporate Trust Services (CTS) business and Wells Fargo Asset Management (WFAM) unit. We expect the net interest margin, loan growth, and consumer spending levels to see some improvement in the first-quarter results, leading to higher core-banking revenues.

Our forecast indicates that Wells Fargo’s valuation is $61 per share, which is 23% above the current market price of close to $49. Our interactive dashboard analysis on Wells Fargo’s Earnings Preview has more details. 

(1) Revenues expected to marginally beat the consensus estimates

Wells Fargo’s revenues increased 6% y-o-y in 2021 to $78.5 billion, mainly driven by a 24% improvement in noninterest revenues, partially offset by a 10% drop in the net interest income (NII). 

• The bank is heavily dependent on Net Interest Income (NII), which contributes roughly 55% of the revenue share. The NII decreased 10% y-o-y in 2021, primarily due to a lower interest rate environment and a drop in outstanding loans. That said, the interest rate scenario has somewhat improved over the recent months. We expect the stream to see some growth in the first-quarter results. 
• WFC’s non-interest income grew 24% y-o-y in 2021. It was driven by higher card and mortgage banking fees, an increase in brokerage advisory, commissions & other fees, and a significant jump in net gains from equity investments. The revenues benefited from the recovery in the consumer spending levels and the rise in total client assets. Further, the one-time gain on equity investments was from sales of CTS, WFAM, and the student loan portfolio in the year. We expect the same momentum to continue in the first-quarter results.
• Overall, we expect Wells Fargo’s revenues to remain around $75.2 billion for full-year 2022.

Trefis estimates Wells Fargo’s fiscal Q1 2022 revenues to be around $18.19 billion, marginally above the $17.82 billion consensus estimate. We expect the growth in core banking and wealth & investment management businesses to drive the fourth-quarter results.

The Fed has increased the interest rates by 0.25% in March, which is likely to be followed by multiple rate hikes in FY2022. This move will likely benefit Wells Fargo’s NII. That said, the investment banking and trading revenues are expected to normalize, with a recovery in the economy. Our dashboard on Wells Fargo’s revenues offers more details on the company’s operating segments along with our forecast for FY2022.

(2) EPS is likely to remain slightly above the consensus estimates

Wells Fargo Q1 2022 adjusted earnings per share (EPS) is expected to be $0.84 per Trefis analysis, almost 4% above the consensus estimate of $0.81. The bank’s adjusted net income grew more than 10x to $20.3 billion in 2021, mainly due to a significant reduction in the provisions for credit losses from $14 billion to -$4.2 billion. Further, the growth in the top line also benefited the profitability figures. 

The adjusted net income margin improved from 2.4% to 25.8% in 2021, mainly due to lower provisions. While we expect the first-quarter earnings to improve on a year-on-year basis, the net income margin is likely to see some drop. Overall, Wells Fargo is likely to report an adjusted net income of $14.4 billion and annual EPS of $3.76 for full-year 2022. 

(3) Stock price estimate is 23% more than the current market price

We arrive at Wells Fargo’s valuation, using an EPS estimate of around $3.76 and a P/E multiple of just above 16x in fiscal 2022. This translates into a price of $61, which is 23% above the current market price of around $49. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

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