Wells Fargo Earnings: A Slow Start to the Post-Asset-Cap Chapter, but No Alarm Bells Are Ringing

Key Morningstar Metrics for Wells Fargo

• Fair Value Estimate
  : $88.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Wells Fargo’s Earnings

Wells Fargo WFC reported softer-than-anticipated first-quarter results on April 14, sending shares downward by roughly 5%. While management reaffirmed its full-year guidance, investors seem to be calling its bluff, particularly on net interest income and potential credit quality.

Why it matters: While the firm grew net revenue across each segment year over year, we were generally disappointed to see a sequential decline in net interest income amid material balance sheet growth and weakening credit metrics.

• Despite sequential growth in average loans and deposits of 4.2% and 2.7%, respectively, we saw net interest income, excluding markets, decline 3.0% from the prior quarter. The benefits of balance sheet growth were offset by a net interest margin that declined 13 basis points to 2.47%.
• With the Basel III reproposal improving return metrics for some lower-risk lending, such as residential mortgage, it was discouraging to see lower net interest margins coupled with worsening credit metrics, namely a 9% sequential rise in provisions, rising charge-offs, and nonperforming assets.

The bottom line: After digesting the results, we are lowering our fair value estimate for Wells Fargo to $88 per share from $93, primarily due to lower near-term net interest income forecasts. We see shares in this wide-moat bank as slightly undervalued after the sell-off.