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Wells Fargo (WFC) Q1 Earnings Beat on Higher NII, Lower Costs

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Wells Fargo’s (WFC - Free Report) first-quarter 2022 earnings per share of 88 cents surpassed the Zacks Consensus Estimate of 81 cents. However, the bottom line declined 14% year over year. Results in the reported quarter included the impact of a $1.1 billion decline in allowance for credit losses.

Despite reporting better-than-expected earnings, shares of WFC have lost almost 4% in pre-market trading. Concerns related the ongoing Russia-Ukraine conflict and raging inflation to the economy and disappointing mortgage loan originations (down 33% year over year) seem to be weighing on investor sentiments.

The company CEO, Charlie Scharf, noted, “Our internal indicators continue to point towards the strength of our customers' financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth. In addition, the war in Ukraine adds additional risk to the downside.”

Results benefited from higher net interest income (NII), provision benefits, a marginal decline in costs and solid average loan growth. Further, WFC’s credit quality remained robust during the quarter. However, disappointing non-interest income and weakness in the mortgage business were the major headwinds.

Net income came in at $3.67 billion, down 21% from the prior-year quarter.

NII Improves on Rise in Loans, Costs Fall

Total revenues came in at $17.6 billion, missing the Zacks Consensus Estimate of $17.8 billion. Also, the top line decreased 5% from the year-ago quarter.

Quarterly revenue generation from the business segments improved on a year-over-year basis. The Consumer Banking and Lending segment’s top line declined 1%, while that of the Commercial Banking segment increased 12%. Further, revenues in the Corporate and Investment Banking and the Wealth and Investment Management units rose 4% and 6%, respectively.

Wells Fargo’s NII came in at $9.2 billion, rising 5%. The increase was mainly driven by lower mortgage-backed securities premium amortization, a fall in long-term debt and higher loan balances, partly offset by lower interest income from loans purchased from securitization pools and Paycheck Protection Program (PPP) loans.

Also, net interest margin (on a taxable-equivalent basis) increased 11 basis points to 2.16%.

Non-interest income fell 14% to $8.4 billion. This was largely due to lower mortgage banking income, trading activity and investment banking (IB) fees. These were partially offset by robust results in its affiliated venture capital and private equity businesses and higher asset-based fees in Wealth and Investment Management and deposit-related fees.

Non-interest expense was $13.9 billion, down 1% year over year. The decrease was largely due to lower personnel expenses.

WFC’s efficiency ratio of 79% was higher than 75% recorded in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.

As of Mar 31, 2022, average loans were $898 billion, up 3% sequentially. Average deposits came in at $1.46 trillion, relatively stable.

Credit Quality Strong

The provision for credit losses was a benefit of $787 million as of Mar 31, 2022, compared with the benefit of $1.05 billion in the prior-year quarter. Non-performing assets decreased 15% to $7 billion.

Net charge-offs were $305 million or 0.14% of average loans in the reported quarter, down from $523 million of 0.24% a year ago.

Capital & Profitability Ratios Deteriorate

As of Mar 31, 2022, Tier 1 common equity ratio was 10.5% under Basel III (fully phased-in), down from 11.8% in the corresponding period of 2021.

Return on assets was 0.78%, down from the prior-year quarter’s 0.97%. Return on equity was 8.4%, down from the year-ago quarter’s 10.3%.

Share Repurchase Update

Wells Fargo repurchased 110.1 million shares for $6 billion in the first quarter of 2022.

Our View

Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. Also, the company is working on its strategic initiatives, which might help regain the confidence of its clients and shareholders. Improving credit quality, rise in interest rates and manageable expense levels are encouraging.

Despite a rise in loan demand, WFC is likely to face challenges in improving revenues given the tough operating backdrop due to higher inflation and ongoing geopolitical concern.

Wells Fargo & Company Price, Consensus and EPS Surprise

Wells Fargo & Company Price, Consensus and EPS Surprise

Wells Fargo & Company price-consensus-eps-surprise-chart | Wells Fargo & Company Quote

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance & Earnings Dates of Other Big Banks

Lower markets revenues, reserve build and decline in IB fees affected JPMorgan’s (JPM - Free Report) first-quarter 2022 earnings of $2.63 per share, which missed the Zacks Consensus Estimate of $2.73. The reported quarter’s results included net credit reserve build and losses in Credit Adjustments & Other.

During the first quarter, JPM reported net credit reserve build of $902 million, given the “higher probabilities of downside risks.”

Bank of America (BAC - Free Report) is scheduled to announce first-quarter 2022 numbers on Apr 18.

Over the past 30 days, the Zacks Consensus Estimate for BAC’s quarterly earnings has moved 1.3% south to 76 cents, implying an 11.6% decline from the prior-year reported number.

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