Is Wells Fargo a Buy After its Q2 2022 Earnings?
28 Juli 2022 - 12:17PM
Finscreener.org
U.S. banking giant
Wells Fargo (NYSE:
WFC) revealed its
second quarter financial
earnings for 2022 on July
15. The shares of this large financial organization gained 6.2%
shortly after, despite the fact that a close examination of its
financials showed significant operational issues. In other words,
the bank has largely fallen short of market revenue
forecasts.
The Federal Reserve’s ongoing
raising of interest rates to battle the decade-high levels of
inflation has both helped as well as hindered the bank’s
operations. The bank’s margins were high as a result of the higher
interest rates, but its mortgage applications decreased year over
year. Given the cyclical orientation of the banking business and
its vulnerability to rising recession risks, is it wise to buy
Wells Fargo stock?
Key financial highlights of Wells Fargo stock in
Q2
In comparison to the prior
yearU+02019s earnings of $6.04 billion, or $1.38 per share, the
bank recorded earnings of $3.12 billion, or $0.74 per share, a
dramatic fall of 46% year over year. Its earnings for the
quarter would have been marginally above market forecasts at $0.82
per share had impairment losses not been a factor. Wells Fargo also
increased its provision for credit losses by $580 million
against the $1.2 billion reserve release in the prior
year.
Additionally, the bank’s overall
quarterly revenue decreased by 16% to $17 billion, and the
noninterest income from mortgage banking decreased dramatically to
$287 million from $1.3 billion recorded a year ago. Wells
Fargo has attributed this drop in revenue to the mortgage
banking industryU+02019s slowdown and its planned divestitures
beginning in 2021.
Noninterest expense was $3
billion less than the previous yearU+02019s $12.9 billion.
Operating losses increased by $273 million to $576 million. The
$375 million noninterest expense, though, was reduced by the
businesses that were divested the previous year.
Was it all bad for Wells Fargo?
Although Well FargoU+02019s
financials had certain shortcomings, there were also a few minor
advancements. The bankU+02019s average loans increased to $926.6
billion, up 8% from the previous year. Average deposits increased
by 1%.
According to Wells Fargo’s CEO,
Charles Scarf, despite a fall in net revenue, the bankU+02019s
underlying statistics show rising profit potential and decreasing
costs. In particular, as a result of higher interest rates, the
bankU+02019s net interest income increased by 16% from the second
quarter of last year, and the net interest margin also increased by
37 basis points.
What does the future hold?
The Federal ReserveU+02019s
aggressive rate-hiking plans, which were intended to be a windfall
for the lenders, didnU+02019t help much during the second
quarter, which was full of headwinds. Although the bank
did benefit from a wider spread in the interest rate, the market
began to fear that a recession was imminent owing to the higher
rates and that the bankU+02019s operations may suffer as a result
of an increase in loan defaults and a decline in loan
demand.
Scarf is nonetheless very hopeful
about the bankU+02019s capacity to survive these upcoming difficult
times. He believes Wells Fargo will continue to profit from the
environment of rising interest rates and that any additional
near-term pressure on noninterest revenue may be more than
compensated by the growth in net interest income. Even while credit
losses will rise from their current incredibly low levels, it
doesnU+02019t appear likely that either the consumer or business
portfolios will experience any significant decline.
Wells Fargo shares have fallen by
around 15% in 2022. The stock is currently priced at $42.9 and the
average consensus target price for the stock is $54.39, which is a
potential upside of over 27%.
The bankU+02019s growth has
mostly been constrained by the fake account crisis in 2016.
Additionally, the weakening financial markets and the periodic
increases in interest rates have further hampered its capacity for
growth. The market, though, is still optimistic about the
bankU+02019s turnaround and believes its years of underperformance
will soon come to an end.
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