Wells Fargo Beats Estimates, but Net Interest Income Could Soon See Pressure

Wells Fargo Stock at a Glance

• Fair Value Estimate (USD): 58.00
• Star Rating: 5 Stars
• Uncertainty Rating: Medium
• Economic Moat: Wide

WFC Earnings Update

Wide-moat-rated Wells Fargo WFC kept a steady outlook across the board, including a steady expense outlook, and most importantly a steady net interest income, or NII, outlook. The deposit base declined by 2% sequentially, which is well within our previous expectation for a 4% decline for all of 2023. Funding costs were also generally developing as expected. We felt going into the quarter that the largest banks and their deposit bases would be fine, and while profitability could face some pressure in the short term, in the longer term it would not be destroyed. We believe current results support our contention that the largest banks in particular will be fine.

While we can’t read through too much to the smaller regionals just yet, so far, the lack of rapidly deteriorating outlooks does support that if the deposit base remains relatively intact, there does not seem to be a profit-destroying increase in funding costs occurring. We’ll wait for more details on the call, but with the outlook remaining unchanged, we do not expect a material revision to our current $58 fair value estimate. We view shares of Wells as undervalued, with the 2024 expense outlook and progress with regulators being the most obvious upcoming catalysts.

First-quarter earnings per share was $1.23, beating the FactSet consensus of $1.14 and our own estimate of $0.95. Net interest income of $13.3 billion and fees of $7.4 billion beat our own estimates of $12.7 billion and $6.6 billion, respectively. The bank’s NII outlook of 10% growth was unchanged. Given the beat in the quarter and unchanged full-year guidance, to us this implies that either growth will come in above 10% or that the 2023 exit rate could be lower than previously anticipated, perhaps even as low as $11 billion. This will be something to watch as the year develops. In other words, some pressure on NII is going to occur for the rest of the year. We previously had NII dropping close to this run rate by 2024, but it could come sooner.