Wells Fargo’s future looks bright after its strong fourth-quarter results

In this article WFC+1.90 (+3.39%)

A man walks past a Wells Fargo Bank branch on a rainy morning in Washington.

Gary Cameron | Reuters

Wells Fargo (WFC) reported better-than-expected fourth-quarter 2021 results before the opening bell Friday .

Total revenue of $20.86 billion (+13% YoY) exceeded the FactSet consensus estimate of $18.79 billion, and adjusted earnings per share of $1.38 (+109% YoY) topped estimates of $1.11.

Included in the results was an 18-cent per share net gain on sales of Wells’ Corporate Trust Service business and Wells Fargo Asset Management, a 17-cent per share gain related to the change in the allowance of credit losses and a 5-cent per share loss related to the impairment of certain leased rail cars. It’s more of a mixed earnings per share outlook when adjusting for these figures, but make no mistake: the core operating results were strong here with much better-than-anticipated revenues, managed expenses and a upbeat forward outlook. Digging into the results

Net interest income of $9.262 billion (+4% QoQ, -1% YoY) exceeded estimates of $9.061 billion estimate. Meanwhile, noninterest income (i.e., fee-based revenues) was $11.594 billion (+17% QoQ, +27% YoY) and topped estimates of $9.931 billion.

As for some other items of note, average loans were $875 billion — that’s down 3% but still better than estimates of $860.9 billion. Loan growth picked up late in the quarter, resulting in period-end loans of $895.4 billion. That represents an increase of 1% YoY and 4% QoQ; it’s also higher than estimates of $866.5 billion. This is a very good sign of things to come. Average deposits increased 7% YoY to $1.5 trillion, higher than estimates of about $1.45 trillion.

Looking to several bank-wide metrics, the bank’s net interest margin (“NIM”) was reported at 2.11%, up 0.08 percentage points from the third quarter and better than estimates of flat quarter over quarter NIM. As a reminder, NIM is essentially the spread between what banks pay on deposits and what they earn on loans. Wells Fargo is one of the most interest rate sensitive banks we follow, meaning a steeper yield curve and higher rates will lead to stronger levels of profitability in the future.

On the expense front, noninterest expense was $13.198 billion, down from $13.303 billion in the third quarter, but slightly higher than estimates of $13.018 billion. The sequential decline in expenses reflects a 2% decrease in personnel expenses (lower salaries, employee benefits and incentive compensation expense) and a 2% increase in non-personnel expenses (things like restructuring charges and advertising and promotion expenses.) WFC in past year

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End of interactive chart. As much as we like Wells Fargo for its interest rate sensitivity, another layer to this story is restructuring and chopping expenses over the next few years. That’s why Wells Fargo’s “efficiency” ratio — is a measure of operating expenses as a percentage of revenues — is so closely watched. In the fourth quarter, Wells Fargo’s efficiency ratio fell significantly to 63% from 70.6% one quarter ago and was much better than estimates of 70%. Wells Fargo still has plenty of restructuring work ahead of them, but the fourth-quarter result was an excellent sign of progress.

The return on tangible common equity (ROTCE) came in at 15.3%, a big improvement from 8.0% one year ago and 13.2% in the third quarter, and the bank’s tangible book value per share (TBVPS) grew to $36.35 from $35.54 in the third quarter and exceeded estimates of $36.17.

On capital returns, the bank continued to repurchase stock hand over fist. Wells Fargo repurchased $7.0 billion worth of stock in the fourth quarter, but there was a $1.4 billion increase in shares associated with annual company contributions to their 401(k) plan. On a net basis, Wells Fargo’s buyback was $5.6 billion, higher than the $5.3 billion buyback in the third quarter. As a reminder, Wells Fargo is working through a four-quarter $18 billion repurchase program that was announced at last year’s CCAR, but that number could go higher because the bank has plenty of capacity to increase its capital distributions.

By division, Consumer Banking and Lending total revenues were $8.733 billion, representing an increase of 1% YoY but a decline of 1% QoQ. Consumer and Small Business Banking (CSBB) revenue was $4.872 billion, up 4% YoY due to higher deposit […]

source Wells Fargo’s future looks bright after its strong fourth-quarter results