Wells Fargo
Inside the Numbers
In Q1, Wells Fargo reported $1.05 in earnings per share which topped analysts' expectations of $0.70 per share. Revenue came in at $18.1 billion against $17.5 billion. Equally important, the bank was positive on loan demand and its outlook for the rest of the year.
The bank also released $1.1 billion in loan loss reserves as the economy has performed better than expected with no spike in defaults. Last year, banks, including Wells Fargo, buttressed their capital reserves in the event of a wave of defaults. This depressed last year's results but is providing a nice tailwind this year as these reserves are slowly returning to normal levels.
It's also an indication that the banks are being run much more conservatively than in the past. Other positive indications are that charge-offs are at historic lows, operating margins improved, and the demand for mortgages remained strong despite a slight uptick in rates.
In terms of small businesses, the bank noted that loan demand remains weak although it's been stable. However, Wells anticipates it to be quite strong in the latter part of the year.
Stock Price Outlook
Following the strong report, Wells Fargo finished 6% higher and then continued trending higher the rest of the week to finish at new highs. Wells Fargo can be considered a turnaround situation as the company is still recovering from its 2016 fake accounts scandal which resulted in stricter oversight from the Federal Reserve including a limit on its asset growth.
New CEO Charlie Scharf, took over in 2019 and has instituted more aggressive risk controls. Wells is one of the largest banks in the US, but it's unusual in that it has the lowest Wall Street exposure. Thus, its stock price and performance are a good proxy for consumer health, small businesses, and real estate. So, it was an underperformer relative to other big banks during the initial months of the recovery when investment banking and trading were strong due to low rates and a strong stock market.
Now, it's been a stealth outperformer. The major factor is the steepening yield curve which makes lending more profitable but other positive factors are the strong real estate market and improving economy. Finally, Wells has low multiples due to the company's scandals a few years ago, but if the company can prove that it's righted these issues then there is the potential for multiple expansion along with earnings growth.
