The dip, given the firm’s solid performance this year, could provide an entry point for investors
Wells Fargo (NSSE:WFC) stock tumbled in early trading Friday after it reported a 9% decline in net interest income (NII).
The share price drop came despite the financial services company’s Q2 earnings and revenue exceeding Wall Street expectations. Wells Fargo reiterated its guidance for NII, but expects rising costs to impact noninterest expenses.
Wells Fargo earnings snapshot
The bank reported earnings per share of $1.33, well above the estimated $1.29, and revenue of $20.69 billion, beating the consensus estimate of $20.29 billion.
For Q2, the San Francisco-based firm reported net interest income of $11.92 billion, down 9% year-over-year, and below the $12.12 billion expected by analysts. The bank also noted that the decline was primarily due to the impact of higher interest rates on funding costs.
Net income dropped to $4.91 billion, compared to $4.94 billion during the same quarter a year ago. The bank’s net interest margin dropped to 2.75% in the second quarter from 3.09% a year ago and 2.81% in March.
For Q2, the financial services company reported a 1% sequential drop in average loans to $917 billion, while average deposits remained stagnant at $1.35 trillion.
On the other hand, Wells Fargo reported a 19% year-over-year jump in noninterest income to $8.77 billion, primarily due to higher trading revenue, higher investment banking fees, and better returns from venture capital investments. The bank’s investment banking revenue increased 38% to $430 million.
For fiscal year 2024, Wells Fargo expects its net interest income to be in the 7% to 9% range, less than the fiscal 2023 NII of $52.4 billion. The bank raised its guidance for noninterest expense to $54.0 billion from $52.6 billion.
Wells Fargo’s NII dropped despite high Federal Reserve interest rates. Expected rate cuts in September could further push down NII for the bank. However, the firm clarified that the drop would be at the higher end of that range, and that “many of the factors driving net interest income are uncertain.”
“At this point in the year, we expect that to be in the upper half of that range, or approximately down 8% to 9%,” Wells Fargo’s finance chief Michael Santomassimo said during the firm’s earnings call on Friday.
Wells Fargo stock – buy or sell after earnings?
Even though Wells Fargo’s earnings and revenue topped analysts’ estimates, its stock tumbled more than 6% in morning trading, reflecting investor concerns over the drop in NII and the increase in noninterest expenses.
Even news that the bank increased its third-quarter dividend by 14% and repurchased more than $12 billion of common stock during the first half of 2024 failed to instill confidence among investors. What does this mean for Wells Fargo stock?
With this in mind, we believe the current drop in Wells Fargo stock could prove a good entry point for investors. Though the stock dropped following the earnings announcement, it is still up more than 20% this year and outperforming the S&P 500.
Though Wells Fargo isn’t the only bank stock that outperformed the S&P 500 this year so far, it did so by a greater margin than rivals JPMorgan Chase and Bank of America.
Additionally, several factors could drive the stock up this year and beyond, including the possibility of the Federal Reserve removing the cap on Wells Fargo’s growth beyond $1.95 billion in total assets. If the cap is removed, it will allow the bank to invest more in its consumer or wealth management business.
Wells Fargo’s practice of returning capital to investors through dividends and buybacks is also expected to drive total returns for years to come. The bank’s outstanding shares have dropped by 21% over the past five years.
Moreover, banks’ transformation efforts are paying off well. This is evident from the fee-based revenue growth and robust performance of investment advisory, trading, and investment banking segments.
