Wells Fargo’s 2023 Outlook Shows That the Net Interest Income Boom May be Over

Wide-moat-rated Wells Fargo (WFC) reported fourth-quarter EPS of $0.67, beating the FactSet consensus of $0.60 and well ahead of our estimate of $0.35 (including $3.5 billion in operating losses). While results will continue to have some noise related to the bank’s legal and regulatory issues, core expenses for the year of roughly $51.6 billion (assuming only $1.3 billion in operating losses) were in line with expectations at the start of the year. Expenses are a key focus for investors as the bank remains in turnaround mode. Based on management’s original 2021 cost-cutting plan and progress to date, we hoped for core expenses to be roughly flat to 1% down in 2023, and management’s guidance of flat core expenses met these expectations.

We believe Wells’ expense initiatives remain on track for another year. Another positive note was the decline in the bank’s estimate of future possible legal losses, which declined from $3.7 billion to $1.4 billion. In the past, this number had often not declined even as the bank took legal charges and accruals. This is a positive sign that the bank is making real progress.

We hoped for some additional positive rate sensitivity going into 2023, leading to some slight growth in 2023 off of the fourth-quarter run rate, however, management’s 2023 net interest income, or NII, guidance of something close to $49.5 billion missed this expectation. We expect a lot of questions on this on the upcoming earnings call. To us, this implies some material declines to be expected from the fourth-quarter run rate.

While the expense outlook was solid, the NII outlook was disappointing. It is occurring at peak rates and may not have a large effect on our long-term estimate of Wells’ through-the-cycle NIM levels. We’ll have to wait for more details on the call but do not currently expect any material revision to our $58 fair value estimate. If there is an effect on our long-term NIM estimate, we expect the impact would be roughly $2-$3 of downside.