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Wells Fargo (WFC) Aided by Cost Control, Hurt by Lower Revenues
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Wells Fargo & Company (WFC - Free Report) has been benefiting from a strong deposit balance, a robust credit position and a solid liquidity profile. The company’s cost-efficiency initiatives might also support bottom-line growth in the upcoming period. Yet, declining revenues due to volatile fee income is a headwind. Lower loan balance due to asset cap and declining mortgage banking income are other major drags.
Wells Fargo continues to build on its deposit base, which witnessed a three-year (ended 2022) compound annual growth rate (CAGR) of 1.5%. However, the metric declined in the first nine months of 2023 mainly due to customers allocating cash to higher-yielding alternatives. Nonetheless, the considerable strength in the consumer business and commercial banking segments will likely support the deposit balance in the upcoming period.
The big bank’s prudent expense management initiatives support its financials. Expenses witnessed a negative CAGR of 0.5% over the last three years (ended 2022). The declining trend continued in the first nine months of 2023. Expense reduction efforts, such as streamlining organizational structure, closing branches and reducing headcount undertaken from third-quarter 2020, have been aiding expense management. The company expects to continue with these efficiency initiatives in 2023. Such efforts are likely to support bottom-line growth.
As of Sep 30, 2023, Wells Fargo’s total debt (comprising long-term debt and short-term borrowings) was $283.36 billion. The company has a strong liquidity position, with a liquidity coverage ratio of 123% as of third-quarter 2023 end, which has been above its regulatory minimum of 100%. It also maintains long-term issuer investment-grade credit ratings of A+, A1 and BBB+ from Fitch, Moody’s and S&P Global, respectively.
Thus, with a solid credit profile and liquidity position, Wells Fargo will be able to meet its near-term debt obligations, even if the economic situation worsens.
Given decent liquidity, the company’s capital deployment activities seem sustainable. Following the clearance of the 2023 stress test, the company increased its dividend by 16.7% to 35 cents per share in July. Also, as of the third-quarter end, it had $29 billion authorization remaining under its share repurchase plan.
However, revenue growth has become challenging for Wells Fargo. Revenues witnessed a negative CAGR of 3.9% over the last four years (2018-2022). Though revenues increased in the first nine months of 2023 on elevated trading activity, the same may not be replicable in the upcoming quarters. Higher funding costs are likely to impede net interest income (NII) and revenue growth. Also, volatility in fee income continues to affect the company’s top-line performance.
Wells Fargo has been registering declines in loans over the past few years on planned run-off from non-strategic/liquidating portfolios. With the asset cap remaining in place until it complies fully with regulators’ demands regarding compliance and operational risk management, Wells Fargo’s loan balance is not likely to improve much. This will, thereby, hamper NII growth.
Wells Fargo’s mortgage banking activities consist of residential and commercial mortgage originations, sales and servicing. Mortgage banking income saw a three-year (ended 2022) negative CAGR of 20.1%, with the decline continuing in the first nine months of 2023.
At the beginning of the year, the company announced its exit from the Correspondent business and the reduction of its mortgage servicing portfolio. This, along with high mortgage rates and low originations, is likely to affect mortgage banking income in the upcoming quarters.
Over the past year, WFC shares have declined 2.4% compared with the industry’s fall of 4.3%.
A couple of other top-ranked stocks from the banking space are JPMorgan Chase & Co. (JPM - Free Report) and Peoples Bancorp (PEBO - Free Report) .
JPM currently carries sports a Zacks Rank #1. Its earnings estimates for 2023 have been unrevised over the past 30 days. In the past six months, JPM shares have improved 11.6%.
Earnings estimates for PEBO have been unrevised for 2023 over the past 30 days. Shares of PEBO have rallied 7% in the past six months. PEBO currently carries a Zacks Rank #2.
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Wells Fargo (WFC) Aided by Cost Control, Hurt by Lower Revenues
Wells Fargo & Company (WFC - Free Report) has been benefiting from a strong deposit balance, a robust credit position and a solid liquidity profile. The company’s cost-efficiency initiatives might also support bottom-line growth in the upcoming period. Yet, declining revenues due to volatile fee income is a headwind. Lower loan balance due to asset cap and declining mortgage banking income are other major drags.
Wells Fargo continues to build on its deposit base, which witnessed a three-year (ended 2022) compound annual growth rate (CAGR) of 1.5%. However, the metric declined in the first nine months of 2023 mainly due to customers allocating cash to higher-yielding alternatives. Nonetheless, the considerable strength in the consumer business and commercial banking segments will likely support the deposit balance in the upcoming period.
The big bank’s prudent expense management initiatives support its financials. Expenses witnessed a negative CAGR of 0.5% over the last three years (ended 2022). The declining trend continued in the first nine months of 2023. Expense reduction efforts, such as streamlining organizational structure, closing branches and reducing headcount undertaken from third-quarter 2020, have been aiding expense management. The company expects to continue with these efficiency initiatives in 2023. Such efforts are likely to support bottom-line growth.
As of Sep 30, 2023, Wells Fargo’s total debt (comprising long-term debt and short-term borrowings) was $283.36 billion. The company has a strong liquidity position, with a liquidity coverage ratio of 123% as of third-quarter 2023 end, which has been above its regulatory minimum of 100%. It also maintains long-term issuer investment-grade credit ratings of A+, A1 and BBB+ from Fitch, Moody’s and S&P Global, respectively.
Thus, with a solid credit profile and liquidity position, Wells Fargo will be able to meet its near-term debt obligations, even if the economic situation worsens.
Given decent liquidity, the company’s capital deployment activities seem sustainable. Following the clearance of the 2023 stress test, the company increased its dividend by 16.7% to 35 cents per share in July. Also, as of the third-quarter end, it had $29 billion authorization remaining under its share repurchase plan.
However, revenue growth has become challenging for Wells Fargo. Revenues witnessed a negative CAGR of 3.9% over the last four years (2018-2022). Though revenues increased in the first nine months of 2023 on elevated trading activity, the same may not be replicable in the upcoming quarters. Higher funding costs are likely to impede net interest income (NII) and revenue growth. Also, volatility in fee income continues to affect the company’s top-line performance.
Wells Fargo has been registering declines in loans over the past few years on planned run-off from non-strategic/liquidating portfolios. With the asset cap remaining in place until it complies fully with regulators’ demands regarding compliance and operational risk management, Wells Fargo’s loan balance is not likely to improve much. This will, thereby, hamper NII growth.
Wells Fargo’s mortgage banking activities consist of residential and commercial mortgage originations, sales and servicing. Mortgage banking income saw a three-year (ended 2022) negative CAGR of 20.1%, with the decline continuing in the first nine months of 2023.
At the beginning of the year, the company announced its exit from the Correspondent business and the reduction of its mortgage servicing portfolio. This, along with high mortgage rates and low originations, is likely to affect mortgage banking income in the upcoming quarters.
Over the past year, WFC shares have declined 2.4% compared with the industry’s fall of 4.3%.
Image Source: Zacks Investment Research
The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Stocks to Consider
A couple of other top-ranked stocks from the banking space are JPMorgan Chase & Co. (JPM - Free Report) and Peoples Bancorp (PEBO - Free Report) .
JPM currently carries sports a Zacks Rank #1. Its earnings estimates for 2023 have been unrevised over the past 30 days. In the past six months, JPM shares have improved 11.6%.
Earnings estimates for PEBO have been unrevised for 2023 over the past 30 days. Shares of PEBO have rallied 7% in the past six months. PEBO currently carries a Zacks Rank #2.