Wells Fargo’s Operating Losses, Fee Pressures Slow Earnings in Q2 2022

Wide-moat-rated Wells Fargo (WFC) reported second-quarter earnings that were disappointing on the surface and, in our view, only average after accounting for impairments in the venture capital portfolio.

The bank reported EPS of $0.74, missing the FactSet consensus of $0.80 and our own estimate of $0.90. Removing the effect of equity portfolio losses, EPS would have been $0.82. Revenue came in at $17 billion ($17.6 billion ex-equity portfolio losses) compared with the consensus at $17.5 billion and our own estimate of $17.86 billion. As a reminder, some losses on the equity portfolio are normal during a full cycle, and the bank recorded billions in gains last year.

As expected, net interest income, or NII, started to show healthy growth in the quarter, given the supportive rate environment. Due to changes in rate expectations as well as continued solid loan growth, management now thinks it could potentially grow NII by 20% this year, up from a mid-teens estimate last quarter and the 8% growth guide laid out at the beginning of the year.

While this is a positive development on the surface, we’ll remind investors that this is essentially pulling forward earnings that had already been forecast and does not materially impact our view of Wells’ earning power through the cycle. We are still a bit skeptical of how durable a federal-funds rate above 2.5% will be by the time we get into 2024, but at least for now, aggressive rate hikes remain on the table and NII will benefit.

As we adjust our short-term NII forecast higher, decrease our short-term fee forecast, and largely keep our core expense forecast the same, we don’t expect to make a material change to our current $58 per share fair value estimate. Despite what we viewed as average earnings, the bank’s shares performed well on July 15, which supports our contention that Wells remains cheap and (beyond getting the asset cap removed) can close the valuation gap by simply executing on its expense goals and rate sensitivity.