Net Interest Income Down 9% In Q2, What To Expect From Wells Fargo Stock?

Wells Fargo’s stock (NYSE: WFC) has lost 17% YTD, as compared to the 18% rise in the S&P500 index over the same period. In sharp contrast, Wells Fargo’s peer, Bank of America (NYSE: BAC), is up 25% YTD. Overall, at its current price of $58 per share, WFC stock is trading 10% below its fair value of $64 – Trefis’ estimate for Wells Fargo’s valuation. 

Amid the current financial backdrop, WFC stock has seen extremely strong gains of 100% from levels of $30 in early January 2021 to around $60 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in WFC stock has been far from consistent. Returns for the stock were 59% in 2021, -14% in 2022, and 19% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that WFC underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including JPM, V, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WFC face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The bank outperformed the consensus estimates of revenues and earnings in the second quarter of 2024. It reported total revenues of $20.7 billion – up 1% y-o-y, driven by a 9% drop in the net interest income (NII), more than offset by a 19% rise in the total noninterest revenues. The NII suffered because of a decline in the net interest margin due to the impact of higher interest rates on funding costs. On the flip side, the noninterest revenues benefited from an increase in investment banking fees, net gains from trading activities, and investment advisory & other asset-based fees. In terms of costs, the provisions for credit losses decreased 28% y-o-y in the quarter. However, total noninterest expenses as a % of revenues witnessed an unfavorable increase. Overall, the adjusted net income was $4.64 billion – at par with the Q2 2023 figure.

The bank’s top line grew 17% y-o-y to $52.4 billion in FY 2023, driven by a 6% gain in consumer banking, a 23% increase in commercial banking, and a 26% jump in the corporate & investment banking segments. On the expense side, the provisions figure witnessed a significant build-up from $1.5 billion to $5.4 billion. However, the negative impact was somewhat offset by a 3% decrease in the noninterest expenses. Altogether, the adjusted net income improved 43% to $17.98 billion.

Moving forward, we expect the noninterest income to drive Wells Fargo’s results in Q3. Overall, Wells Fargo’s revenues are estimated to remain around $81.8 billion in FY2024. Additionally, WFC’s adjusted net income margin is expected to see a slight improvement in the year, leading to an adjusted net income of $18.1 billion. This coupled with an annual EPS of $5.10 and a P/E multiple of just below 13x will lead to a valuation of $64.

[1] Returns as of 7/16/2024
[2] Cumulative total returns since the end of 2016

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