Wells Fargo Earnings: Net Interest Income Outperforming Despite Rising Expenses

Wells Fargo Stock at a Glance

• Fair Value Estimate: $61
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Wells Fargo Earnings Update

Wells Fargo WFC reported decent second-quarter results, ahead of both consensus and our expectations. The bank had some key updates to its outlook, most of which were already hinted at during a previous conference.

The expense outlook increased to $51 billion from $50.2 billion, excluding operating losses. This was largely driven by higher severance charges and less attrition than the bank previously expected, which we would view as more temporary in nature. Some of the increases may also be a bit more structural, notably in technology and advertising spending. As such, we plan to slightly increase our expense forecasts.

The other change to the outlook was an increase in full-year expectations for net interest income, or NII, to growth of 14% from 10%. The bank is still on track with our deposit balance and pricing forecasts—a positive in the current environment. We see much of the outperformance being driven by better repricing on the asset side than we anticipated. The deposit base is still down only 3% halfway through the year, and management commented that it’s seeing a slowdown in the shift of deposits into higher-yielding alternatives.

While we are not quite at the end of this cycle, we think we are getting closer to some sort of equilibrium. We also believe NII will have to come back down eventually, and we would not read too much into short-term increases. We believe current results continue to support our contention that the largest banks will be fine.

As we update our forecasts, we do not plan to make a material change to our fair value estimate of $61 per share, and view shares as undervalued. We do not expect any major consent order catalysts until 2024 at the earliest, while 2024 guidance will not come out until the fourth-quarter 2023 results. In the meantime, we like Wells’ outsize ability to keep repurchasing shares, as the bank bought up another roughly 2.6% of outstanding shares in the quarter.