Wells Fargo Earnings: Like Last Quarter, Net Interest Income Outperforms

Key Morningstar Metrics for Wells Fargo

• Fair Value Estimate: $61.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Wells Fargo’s Earnings

Wells Fargo’s WFC third-quarter results were similar to last quarter’s. The expense outlook, excluding operating losses, increased once again, this time to $51.5 billion (from $51 billion last quarter and $50.2 billion at the start of the year). While higher severance charges are undoubtedly at play, the higher technology, advertising, and salary expenses may be more structural, and we plan to slightly increase our expense forecast as a result. The full-year 2024 outlook, coming next quarter, will be a key update in determining how much lower the bank’s core expense base can go. We had been hoping for something closer to $50 billion, but we think it may be tough to get rid of another $1.5 billion from here.

The bank’s outlook for net interest income, or NII, also went up again. Wells now expects growth of 16% year over year in 2023, up from 14% last quarter and 10% originally. Deposits were up 1% during the quarter (better than peers), and deposit pricing trends were in line with our expectations as deposit betas approached 100%. While we’re not quite at the end of this cycle, Wells is not showing any signs of stress within its NII profile, and we think we’re getting close to some sort of equilibrium.

As we update our forecasts, we do not plan to make a material change to our $61 per share fair value estimate and view the shares as undervalued. We do not expect an asset cap catalyst until 2024 at the earliest, with 2024 guidance being the next potential valuation mover. We think Wells remains more undervalued than the “non-turnaround” peers, and while Citigroup C is also cheap, Wells seems further along in its journey. Our sense is the market is still worried about the risks of higher rates and uncertainty around future profitability. As the cycle plays out more fully, we think more certainty will emerge around these issues.