AAPL - Wells Fargo Fourth-Quarter Earnings Preview: 5 Things To Consider

2024-01-07 10:30:00 ET

Summary

• Bullish investors anticipate up to five interest rate cuts by the Federal Reserve in 2024, boosting bank stocks.
• Wells Fargo has limited job cuts and is the best-performing bank stock in the last three years.
• WFC's Q4 earnings report is expected to show growth in consumer banking revenue and improved operating margins.

After markets roared higher from the October 2023 lows, the optimism lifted bank stocks. Bullish investors chose to anticipate the Federal Reserve would cut interest rates. One portfolio manager believes the Fed needs to cut rates five times in 2024. Rate cut expectations are between three and six times . Unless the FOMC (Federal Open Market Committee) cuts interest rates by 25 basis points after its Jan. 30-31 meeting, bank stocks trade like speculations.

Before the Sept. 2023 meeting, markets thought interest rates would remain higher for longer. Today, expectations of lower rates might overshadow banks posting their quarterly earnings. On Friday, Jan. 12, 204, Wells Fargo (WFC) will post results. I previously covered WFC stock extensively in 2020 . Since the last 'Buy' article , WFC stock returned 136%, beating the S&P 500's ( SPY ) 36.57% return.

How did the macro environment change in three years? What will Wells Fargo's earnings report look like? There are five considerations ahead of the bank's report.

1) Wells Fargo in 2020

Wells Fargo limited its job cuts in Oct. 2020, ahead of the Presidential election. It did not want the negative attention. Since then, the firm reduced its headcount every quarter since the third quarter of 2020. The firm said on its Q3/2023 conference call that it believed it had more opportunities to cut staff. Since attrition remains low, it will likely lead to more severance expenses for actions in 2024.

Investors are supportive of the staff cuts. WFC stock is the best-performing bank stock in the last three years. Investors widely favor JPMorgan Chase (JPM) for its strong management, yet it trailed Wells Fargo's return:

To Seeking Alpha Quant's credit, both WFC and JPM stock have a strong buy rating.

Wells Fargo also scores the best on growth with an A-. Goldman Sachs ( GS ), whose rocky exit from Apple ( AAPL ) credit card, scored poorly on valuation and profitability. Still, GS stock outperformed Bank of America ( BAC ). Citigroup ( C ) lost 11.94% in the period.

Citi is continuing an uncertain path. It is exploring plans to roll out its China investment banking arm by the end of this year . China has serious weaknesses in its real estate market. This is hurting consumer spending. Local governments collect less land transfer taxes, too. China's banks are struggling to operate profitably as a result.

2) Weak Macro Economy

Wells Fargo and its competitors need to navigate past the weak economy that began last year. At the Goldman Sachs 2023 US Financial Services conference , Chief Executive Officer Charlie Scharf said that consumers are very strong in today's economy. Businesses are strong, thanks to strong demand from consumers. The impact of rising rates has yet to fully show up in the system.

Wells Fargo has the soft landing scenario as its base case. Even with a slight downturn, its impact on the bank's results is minimal. CEO Scharf is effectively underestimating future risks. WFC stock trades at 41.62% above its 52-week low and only 1.67% below its 52-week high (from a month ago). It does not have room to disappoint investors this Friday.

3) Expected Growth

The bank previously posted its consumer, small, and business banking revenue increased by 7% Y/Y. It benefited from higher net interest income. High interest rates are tailwinds to NII. Lower deposit-related fees from the bank's overdraft policy change offset NII.

The bank invested in its Chicago branch network and will invest in refurbishing branches across the existing network. These locations will offer a digital onboarding experience for customers. By cutting its total branch count by 6% Y/Y, Wells will post stronger profit margins per location.

Home lending revenue fell by 14% Y/Y in the last quarter. In the upcoming report, expect Wells to report higher efficiencies from the mortgage unit after it cut staff by 37% Y/Y. Looking ahead, the bank might forecast improving operating margins thanks to further staff cuts. Lower mortgage rates, which is 6.49% for a 15-year fixed mortgage , should drive mortgage refinancing. In Q3, the bank "expanded its special-purpose refinance offers to prequalified Hispanic customers with Wells Fargo mortgages to refinance at a lower than market rate."

The bank offered a $10,000 homebuyer access grant for homebuyers who live and buy homes in various under-served communities. This, too, should help mortgage volumes.

Wells Fargo will report healthy credit card activity. Consumer spending is consistent across both debit and credit spending. Since its customers have very strong credit quality, delinquency rates should remain low. Moreover, the steady spending levels suggest that inflation rates, which are now slowing, will not hurt the credit business.

4) Bank Priorities

Wells Fargo continues to prioritize managing through the asset cap. The Federal Reserve restrained the bank for more than five years. Executives expect this constraint for at least another year . Adhering to the constraints is costly. CEO Scharf said that it "Takes up a significant amount of resources, both financial resources in addition to management time." Given it is a pass-fail gate that the bank must get through, satisfying regulators is Wells Fargo's priority.

Amid the regulation, the CEO Scharf said that the bank is not efficient. It continues to focus on achieving higher efficiency. In FQ4 2023, analysts expect the bank to earn $1.10 per share, compared to $1.45 a share in FQ4 2022.

Based on 11 analysts, revenue will grow by 3.59% to $20.37 billion in Q4.

The revenue growth trails the sector. Still, strong dividend per share growth lifts its stock grade. The WFC growth grade is an A-. The stock has a higher EPS forward long-term growth rate that beats the sector by nearly 45%:

5) Relative Market Strength

Investors considering profit-taking on WFC stock need to consider the stock market's recent strength. The bank stock has a high correlation to the S&P 500. Since late October 2023, WFC stock took off sharply while the S&P trailed.

Markets appear too confident on three to five rate cuts of 25 bps each (0.75% - 1.50%) in 2024. The Fed may cut rates as early as this month or delay a 25 bps cut for its next meeting.

Your Takeaway

Wells Fargo's performance will break from the rate cut speculation if it posts a strong Q4 report. It would solidify the stock's uptrend.

When the FOMC meets later this month, the rate policy may have an influence on all the bank stocks ( KBE ), including WFC stock. Similarly, bank stocks as a whole may have volatility in March. The Bank Term Funding Program ("BTFP"), which prevented a run on the regional banks last year, expires that month.

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