The dip, given the firm’s solid performance this yr, 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 got here 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 affect 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 as a result of the impact of upper rates of interest on funding costs.
Net income dropped to $4.91 billion, in comparison with $4.94 billion through the same quarter a yr ago. The bank’s net interest margin dropped to 2.75% within the second quarter from 3.09% a yr ago and a pair of.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.
However, Wells Fargo reported a 19% year-over-year jump in noninterest income to $8.77 billion, primarily as a result of higher trading revenue, higher investment banking fees, and higher returns from enterprise capital investments. The bank’s investment banking revenue increased 38% to $430 million.
For fiscal yr 2024, Wells Fargo expects its net interest income to be within the 7% to 9% range, lower 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 rates of interest. Expected rate cuts in September could further push down NII for the bank. Nonetheless, the firm clarified that the drop could be at the upper end of that range, and that “most of the aspects driving net interest income are uncertain.”
“At this point within the yr, we expect that to be within the upper half of that range, or roughly down 8% to 9%,” Wells Fargo’s finance chief Michael Santomassimo said through the firm’s earnings call on Friday.
Wells Fargo stock – buy or sell after earnings?
Although Wells Fargo’s earnings and revenue topped analysts’ estimates, its stock tumbled greater than 6% in morning trading, reflecting investor concerns over the drop in NII and the rise in noninterest expenses.
Even news that the bank increased its third-quarter dividend by 14% and repurchased greater than $12 billion of common stock through the first half of 2024 did not instill confidence amongst investors. What does this mean for Wells Fargo stock?
With this in mind, we consider the present drop in Wells Fargo stock could prove an excellent entry point for investors. Though the stock dropped following the earnings announcement, it remains to be up greater than 20% this yr and outperforming the S&P 500.
Though Wells Fargo isn’t the one bank stock that outperformed the S&P 500 this yr thus far, it did so by a greater margin than rivals JPMorgan Chase and Bank of America.
Moreover, several aspects could drive the fill up this yr and beyond, including the opportunity 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 should allow the bank to take a position more in its consumer or wealth management business.
Wells Fargo’s practice of returning capital to investors through dividends and buybacks can also be expected to drive total returns for years to return. The bank’s outstanding shares have dropped by 21% over the past five years.
Furthermore, banks’ transformation efforts are paying off well. This is clear from the fee-based revenue growth and robust performance of investment advisory, trading, and investment banking segments.