Bank stocks have been on an absolute tear of the past several weeks, driven by optimism over a vaccine which eased concerns not only about widespread customer defaults, but also the possibility that interest rates may soon begin to rise.
One of the main beneficiaries of improving sentiment has been Wells Fargo (WFC). But it’s now worth asking whether optimism has run too far ahead of expectations. The bank is set to report first quarter fiscal 2021 earnings results before the opening bell Wednesday. We have asked from some time, when will it be time to place a long-term bet on Wells Fargo shares? We now have that answer. Wells Fargo stock has been a hot commodity among banks, skyrocketing more than 60% over the past six months.
While there are still plenty of challenges for Wells Fargo, including the fact that it has to balance much-needed cost cuts with revenue/business growth, the bank has nonetheless executed as well as anyone might have expected. Last quarter, not only were the bank’s charge-offs and core provisioning both better than expected, Wells Fargo’s adjusted expenses were also lower, helping to deliver a 12% beat on the bottom line.
Notably, this is with the bank revenue generation still under pressure by both the weaker rate environment and the adjustments Wells Fargo has had to make to stay in compliance with the asset cap. As it stands, the bank now has tons of catalysts to sustain profitability and return value to shareholders. With the stock now up 32% year to date, besting the 9% rise in the S&P 500 index, the market appears willing to look beyond some of the bank’s legacy issues and certainly some near-term headwinds. But has Wells Fargo stock performed too well to sustain more returns?
For the three months that ended March, analysts expect Wells Fargo to earn 68 cents per share on revenue of $17.46 billion. This compares to the year-ago quarter when earnings came to 1 cent per share on revenue of $17.72 billion. For the full year, ending in December, earnings are projected to be $2.91 cents per share, up from 41 cents per share a year ago, while full-year revenue of $69.39 billion would decline 4.1% year over year.
Aside from progress on vaccines, investors are encouraged by the Fed’s recent decision to allow Wells Fargo to resume buying back shares and paying dividends. The Fed is signaling Wells Fargo’s loan losses are no longer as risky as they were are the start of the pandemic. In that vein, in the fourth quarter, the bank saw net charge-offs dip from prior periods leading to an actual reduction. That said, the disruption caused by the pandemic has taken a considerable toll on Wells Fargo’s operations as Q4 revenue missed by about $90 million, while revenue fell about 10% year over year.
But thanks to diligent cost controls, Wells Fargo still beat on the bottom line by 7 cents. Wells Fargo has highlighted various cost-cutting initiatives that will be key to the bank’s ability to steadily increase earnings and its overall turnaround strategy. These include plans to slash some $10 billion in expenses — whether via organizational structure optimization and branch rationalization. That said, the bank must do its part on Wednesday to convince the market it can meet these expectations.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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