Is Wells Fargo a Buy After its Q2 2022 Earnings?

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 year's 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 industry's slowdown and its planned divestitures beginning in 2021.

Noninterest expense was $3 billion less than the previous year's $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 Fargo's financials had certain shortcomings, there were also a few minor advancements. The bank's 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 bank's underlying statistics show rising profit potential and decreasing costs. In particular, as a result of higher interest rates, the bank's 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 Reserve's aggressive rate-hiking plans, which were intended to be a windfall for the lenders, didn't 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 bank's 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 bank's 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 doesn't 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 bank's 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 bank's turnaround and believes its years of underperformance will soon come to an end.

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