Analyst Note| Eric Compton, CFA |
Wide-moat Wells Fargo reported OK second-quarter earnings. While the bank easily exceeded FactSet consensus of $0.98 with reported EPS of $1.38, the beat was primarily driven by reserve releases, which is only a temporary source of higher earnings. Reported return on tangible common equity was 16.3%. The bank continued to release reserves, releasing another $1.6 billion in the quarter. If we assume provisioning would have been closer to the 2019 run rate of roughly $670 million, ROTCE would have been closer to 12%, and if we bring the gains on equity securities down to a $500 million run rate, we estimate the ROTCE would fall closer to 8.4% . This is an improvement over the 8% normalized rate we calculated last quarter, but the bank still has a way to go to hit the short-term goal of 10%. Now, while 10% may seem like a long way off, keep in mind that bringing capital levels down to management’s goal of a 10.5% common equity Tier 1 ratio should improve ROTCE by roughly 100 basis points, give or take, which gets the bank within spitting distance of the 10% goal. Management did say that it expects to hit a 10% ROTCE at some point in 2022.