Wells Fargo Posts Disappointing First-Quarter Earnings

Wide moat-rated Wells Fargo (WFC) reported disappointing first quarter earnings from our perspective. While the bank reported EPS of $0.88, beating the FactSet consensus of $0.81 and our own estimate of $0.79, the beat was solely driven by declines within the allowance for loan losses. Removing the effect of this, which is essentially a non-core item, and EPS would have been $0.67. Top line revenues came in at $17.6 billion compared to consensus of $17.8 billion and our own estimate of $18.1 billion.

NII was essentially flat sequentially, but the news wasn’t all bad for NII. Due to recent changes in rate expectations as well as better than expected loan growth, management now thinks they could potentially grow NII by a mid-teens amount this year, roughly double the 8% growth guide from last quarter. We had already forecasted mid-teens growth for 2023, so this is essentially just pulling forward growth we had already planned for and does not materially affect our view of Wells’ through the cycle earnings power.

For us, the main disappointment was fees, which came in below our expectations, and the outlook was not positive either. Mortgage and investment banking fees fell off harder than we had hoped, and wealth management related fees dropped compared to last quarter, whereas we were hoping for continued growth. It seems that mortgage and wealth fees will likely continue to drop next quarter.

Expenses were essentially in line with our expectations, however operating losses came in at $673 million, driven by additional customer remediation expenses. It remains difficult to tell when these types of charges will completely disappear. If the bank drops down to a quarterly run rate of $200 million, they could still meet the $1.3 billion annual target, but this type of start to the year does make the $1.3 billion level look less certain.

Due to the worse than expected fee income development, we expect to decrease our current fair value estimate of $62 by roughly $4.

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