Club holding Wells Fargo (WFC) reported much better than feared second-quarter results before the opening bell, and shares soared 7% in Friday’s strong overall market. Total revenue of $17.03 billion, a decrease of 16% year-over-year, missed the FactSet consensus estimate of $17.43 billion. Adjusted earnings-per-share of $0.82, excluding an $0.08 per share impairment, edged estimates of $0.81. Bottom line Not the cleanest of quarters but that’s consistent with the other banks that have reported so this earnings season. But what is important to know here is that the core parts of the WFC bullish thesis, which is based on expense reduction and the positive impact higher interest rates have on net interest income, remains intact. Loan growth is still healthy, and the bank still has capacity to buy back shares when they believe is appropriate. For these reasons, we believe investors are looking past the noise of the quarter. Still, given the economic uncertainty that lies ahead, we are reducing our WFC price target to $50 per share, but we’re keeping our 1 rating on the stock. Key company metrics Before digging into the various operating segments, let’s take a quick look at how some key overall metrics stacked up in the second quarter. Net interest income: $10.2 billion, up 16% year-over-year, versus $10.12 billion expected. Net interest margin: 2.39% vs. 2.32% expected. Non-interest income: $6.83 billion versus $7.4 billion expected. Non-interest expense: $12.88 billion, down 3% year-over-year and down 7% over last quarter, versus $12.73 billion. Return on average tangible common equity (ROTCE): 8.6% versus 9.2% expected Efficiency ratio: 76% versus 72.5% expected. Common equity tier 1 (CET1) capital ratio: 10.3%, down from 10.5% last quarter due to strong capital returns and a decline in cumulative other comprehensive income driven by higher interest rates, among other reasons, but well above the regulatory minimum of 9.1% Period-end Loans: $943.7 billion, up 11% year-over-year and 4% over last quarter versus $923.65 billion expected. Fourth consecutive quarter of loan growth. Average deposits: $1.46 trillion, 1% increase year over year, versus $1.48 trillion expected. Tangible book value per share (TBVPS): $34.66 vs. $35.56 expected. Segment results Consumer Banking and Lending total revenue Q2 was $8.51 billion, down 2% over last year and down 1% over last quarter. Consumer and small business banking (CSBB) revenue increased 17% year-over-year primarily due to higher interest rates and deposit balances. Within consumer lending, home lending was down 53% over last year and down 35% over last quarter on lower originations and gain on sale margins, among other things. Credit card revenue increased 7% over last year on higher loan balances, which speaks to the normalization of consumer balance sheets post-Covid. It also reflects an increase in point of sale volumes. Auto rose 5%, also on higher loan balances, and personal lending was up 7% versus the year ago period. Commercial Banking total revenue Q2 was $2.49 billion, up 18% year-over-year and up 7% over last quarter. Middle market banking revenue of $1.46 billion represented an increase of 27% over the same period last year, on the back of higher rates and loan balances. Asset-based lending and leasing revenue of $1.03 billion increased 8% year-over-year, driven by higher loan balances. Corporate and Investment Banking total revenue Q2 was $3.57 billion, up 7% year-over-year and up 3% over last quarter. Total banking revenues increased 4% year-over-year but was essentially flat sequentially with the annual advance reflecting higher rates and loan balances that were partially offset by lower investment banking fee revenue resulting from lower market activity. Commercial real estate revenue increased 5% year-over-year, again on higher rates and loan balances that were partially offset by lower capital markets results. Total markets revenue was up 11% annually driven by higher foreign exchange and commodities trading revenue that were compounded by increased equities trading revenue. Wealth and Investment Banking total revenue Q2 was $3.71 billion, up 5% year-over-year. Net Interest Income increased 50% year-over-year thanks to higher rates. Non-Interest Income, however, fell 5% annually on lower asset-based fees primarily due to a decline in market valuations, and lower transactional activity. For the rest of 2022 A couple of reasons why we have remained invested in Wells Fargo despite concerns of an economic recession are because of its interest rate sensitivity and our belief that management can meaningfully reduce expenses. That’s why on the call we were pleased to see management raise its net interest income outlook this year. Management now expects to see this figure increase approximately 20% from 2021 levels. This view is an upgrade from their previous call of about 15% year over-year-growth and much stronger than the 8% increase management expected at the beginning of the year. An aggressive Federal Reserve interest rate hiking cycle will do that. On the expense front, management reiterated its view that full year 2022 expenses are still expected to be approximately $51.5 billion. We’ll take this as a small win due to ongoing inflationary pressures and higher operating losses. Looking to next year, management set the expectation that it wants to see net expense reduction. This is another positive update. As expected, there was no formal update around the timing of when the asset cap placed on Wells Fargo will be lifted. Although we cannot predict when this event will occur, we believe management is working hard to fix its problems. Once the cap is lifted, we believe Wells Fargo will be less constrained and will seek more deposit growth, leading to stronger ROTCE performance, and a stock re-rating. Capital returns Wells Fargo did not repurchase any shares in the second quarter, consistent with previous commentary, even though this year’s Federal Reserve stress test confirmed the bank has the capacity to return excess capital to shareholders. The bank plans to be prudent and will consider market conditions and the various banking and economic crosswinds before making share repurchase decisions over the coming quarter. On the dividend side, as previously announced, the bank plans to increase its third quarter dividend by 20% to $0.30 per share. (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
