Wells Fargo reported better-than-expected earnings results on Friday, but some weakness under the hood is putting a lid on the bank’s stock. Stay the course: Shares should move higher as management continues to shake off regulatory punishments for past misdeeds. Total revenue for the three months ended Mar. 31 ticked up less than 1% over last year, to $20.86 billion, exceeding analysts’ expectations of $20.2 billion, according to LSEG. Adjusted earnings of $1.26 per share was nicely above Wall Street’s consensus estimate of $1.11 per share, LSEG data showed. Note: The $1.26 EPS excludes a 6-cent per share ($284 million hit to net income) negative impact from a Federal Deposit Insurance Corporation (FDIC) special assessment for the rescue of regional banks after last year’s failure of Silicon Valley Bank. This special assessment charge was a 40-cent per share headwind in the fourth quarter of 2023. Wells Fargo Why we own it : We bought Wells Fargo as a turnaround story under CEO Charlie Scharf. He’s been making progress cleaning up the bank’s act and fixing its previously bloated cost structure after a series of misdeeds before his tenure. Scharf has also been working to get the Fed’s $1.95 trillion asset cap lifted and to boost Wells Fargo’s fee-generating revenue streams. Competitors : Bank of America and Citigroup Weight in Club portfolio : 4.76% Most recent buy : Feb. 24, 2022 Initiated : Jan. 8, 2021 Bottom line The results skew positive, even with some key line-item misses. For one, the bank’s overall efficiency ratio was a tad higher than expected. (The ratio is non-interest expense divided by total revenue, the lower the ratio the better the efficiency). However, we expect to see that number come down over time as management continues to address regulatory concerns and makes progress toward the ultimate removal of the asset cap. In addition, the bank’s net interest margin came up short, and therefore net interest income. We aren’t too surprised given that interest rates are a double-edged sword for banks. Higher rates mean higher revenue generation on loans; they also mean higher funding costs (interest payments on deposits) as customers withdraw deposits in search of higher yields elsewhere. None of this is news: We’ve seen this dynamic play out for several quarters already. That said, in general, higher rates are a net positive for Wells Fargo’s bottom line. Many positives outweighed the negatives. For example, non-interest expenses increased this quarter to a level above Street estimates, but non-interest income advanced at a faster rate and ahead of expectations. Likewise, the bank’s tangible book value per share came in a bit soft but was more than offset by better-than-expected return on tangible common equity performance — a key metric that investors take into heavy consideration when determining the appropriate valuation multiple to place on a bank’s stock. Also a plus: The bank’s provisions for credit losses were much lower…
Read More: Wells Fargo is flat after an earnings beat — why we stay the course
