Wells Fargo Q3 preview: Where next for WFC stock?

Josh Warner
By :  ,  Market Analyst

When will Wells Fargo release Q3 earnings?

Wells Fargo is scheduled to release third quarter earnings before markets open on Friday October 14. A conference call will be held on the same day at 1000 ET.

 

Wells Fargo Q3 earnings consensus

Wall Street forecasts revenue will dip 0.3% from last year to $18.77 billion in the third quarter and that diluted EPS will fall 6.9% to $1.09.

 

Wells Fargo Q3 earnings preview

It is expected to be another tough quarter for US banks this earnings season, with earnings set to fall across the board. You can read more about what to expect this season in our US Banks Q3 Earnings Preview.

Wells Fargo stands out from most of its major peers. The company has a more traditional style of banking concentrated on borrowing and lending, which means it has less exposure to investment banking and trading than its rivals. It is also focused on its domestic operations in the US, where the economy is proving more resilient, whilst many of its rivals have businesses sprawled around the world.

Wells Fargo’s focus on lending and its consumer and corporate businesses means it is poised to be among the biggest beneficiaries of higher interest rates. Markets will be focused on how demand for loans is shaping up as this will ultimately decide how much reward Wells Fargo can reap from higher rates.

Markets were briefly expecting last week that the Federal Reserve would start to pivot towards a more dovish stance, but this was quickly dashed after the latest data showed rising rates are yet to feed through to the jobs market and several members of the central bank said rates would continue to rise to get inflation down. With that in mind, US inflation data on Thursday – the day before Wells Fargo reports – will be the next key set of numbers that markets will use to gauge the Fed’s mood, with FOMC meeting minutes also out on Wednesday. You can read more about these events, which could prove influential on the share price of US banks, in our Week Ahead.

Net income growth is expected to jump over 30% from last year to $11.6 billion thanks to rising interest rates, allowing its net interest margin to improve to 2.68% from 2.03% the year before.

However, this is expected to continue to be countered by weaker non-interest income, forecast to plunge 29% this quarter to $7.09 billion, as rising rates and the selloff in financial markets hits its venture capital, mortgage, investment banking and brokerage advisory arms, resulting in minor dip in overall revenue this quarter. Higher interest rates are curtailing demand for mortgages and the challenging market conditions are weighing on appetite for major deals and resulting in lower fees for the bank spawning from the likes of IPOs and M&A. Plus, the market selloff in 2022 has hurt the value of its equity holdings and has seen it book hefty impairments.

‘Looking ahead, our results should continue to benefit from the rising interest rate environment with growth in net interest income expected to more than offset any further near-term pressure on noninterest income,’ said CEO Charlie Scharf back in July, suggesting markets, which believes overall revenue will continue to decline in the fourth quarter, are more cautious on this front than management for now.

The other element to watch is how Wells Fargo is handling costs as it tries to maximise the rewards on offer from higher rates. The bank has set itself a budget of $51.5 billion for annual core expenses and a reiteration of this target is needed. Analysts believe costs will be fall to $12.3 billion in the third quarter from $12.8 billion the year before, demonstrating it is still finding waste to cut.

Still, earnings remain under pressure as banks have once again started to build their reserves for potentially bad loans as the economic outlook remains uncertain and a recession looks to be just around the corner. Wells Fargo is expected to book $612.1 million worth of provisions for credit losses in the third quarter, which will be a major drag considering this provided a $1.4 billion boost to profits the year before, when it was unwinding reserves that had been put aside during the pandemic.

‘We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios,’ said Scharf at the end of the last quarter.

Customers may remain in a healthy position for now, but Wells Fargo has signalled it will continue to build its reserves going forward and Wall Street believes it will put even more aside in the fourth quarter.

On a more positive note, its return on equity (ROE) is forecast to rise to 10.2% in the third quarter, marking a significant improvement from the 7.1% seen in the second but still below what it was delivering a year ago.

Wells Fargo had a CET1 ratio of 10.3% at the end of the second quarter and performed well in the latest stress tests, with only a small capital build needed before the fourth quarter deadline. That allowed Wells Fargo to raise its dividend for the third quarter unlike others such as JPMorgan and Citigroup, both of which were told they must strengthen their capital buffers and were forced to keep their payouts flat and temporarily suspend buybacks. Wells Fargo has said it will continue to return excess capital to shareholders through buybacks.

It is worth remembering that Wells Fargo has a unique problem that spans way back to 2018, when the Federal Reserve imposed an asset cap on the company following a string of scandals and failures across the business, from overcharging consumers to having millions of fake accounts on its books. This has prevented the bank from growing its balance sheet over the $1.95 trillion it had back in 2017, which in turn has limited its ability to lend, invest and ultimately grow.

 

Where next for WFC stock?

Wells Fargo shares are down over 18% since the start of 2022 but they have outperformed rivals considering the Dow Jones US Bank Index is down over 26%.

We have seen a symmetrical triangle form over recent weeks. A downtrend that can be traced back to March is now coinciding with a newer rising level of support that has emerged since the stock hit a 28-month low back in June. This a neutral pattern but suggests trading will continue to narrow between these two trend lines until breaking out and providing a signal on what direction it will head next.

A break below $40 would see the rising line of support collapse and could open the door for a fall toward the multi-year low of $37. Meanwhile, a break above the downtrend, which will be possible by recapturing the 50-day moving average at $43.50, could allow it to target a move above $46 to break the ceiling that has limited the stock over the past six months.

Where will WFC stock head next as trading narrows?

Notably, the 28 brokers that cover Wells Fargo currently have an average target price of $52.80, implying the selloff this year has been overdone and that there is over 26% potential upside from current levels.

 

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