Wells Fargo Earnings: Strong Fee Income and Expense Control Mark a Good Quarter

Key Morningstar Metrics for Wells Fargo

• Fair Value Estimate: $60.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Wells Fargo’s Earnings

Wells Fargo WFC reported good results for the third quarter, as fee income was strong and expenses were largely controlled. The shares were trading around 6% higher after the bank reported its results. The decline in net interest income during the quarter was largely expected, and the bank’s tepid performance in terms of loan growth was the only negative for us.

The headwind from net income margin compression in the upcoming quarters is expected to be offset by balance sheet growth, even as Wells Fargo’s performance was slightly disappointing compared with JPMorgan’s JPM in terms of loan growth, with its average loan balances down about 3.5% on a year-over-year basis and 0.8% on a sequential basis. We expect loan growth to pick up in the coming quarters as declining interest rates generate more demand for loans.

The bank reported earnings of $5.1 billion, or $1.42 per share, in the quarter, which included a $0.10-per-share nonrecurring loss related to repositioning its investment securities portfolio. That repositioning led to a loss in the current quarter, but it should also lead to higher interest income in future quarters. Earnings per share grew by 2.7% on a year-over-year basis after excluding the impact of the nonrecurring portfolio repositioning.

The third-quarter numbers resulted in a return on tangible equity of 13.9%, slightly lower than the 15.0% target management has previously talked about. We maintain our fair value estimate of $60 per share as we incorporate the results. The bank’s shares are up by more than 50% in the past year, and we believe it is fairly valued.

The bank reported NII of $11.7 billion in the quarter, 11% lower on a year-over-year basis, due to NIM contraction. The bank’s NIM was reported at 2.67%, compared with 2.75% in the previous quarter and 3.03% in the same quarter last year.