Wells Fargo & Company's WFC strong capital position, rise in deposit balance and cost-efficiency initiatives are likely to keep aiding financials in the quarters ahead. However, declining revenues and lower loan balances make us apprehensive.
Looking at its fundamentals, the company's expenses witnessed a negative compound annual growth rate (CAGR) of 0.5% for the three years ended 2022. The declining trend continued in the first quarter of 2023. Expense reduction efforts such as streamlining organizational structure, closing branches and reducing headcount undertaken from third-quarter 2020 aided the decline in costs. WFC expects these initiatives to continue this year, which will likely keep supporting bottom-line growth.
The deposits witnessed a rise in CAGR of 1.5% for the three years ended 2022. The metric declined in the first quarter of 2023. The considerable strength in the consumer business and commercial banking segments will likely support the deposit balance in the upcoming period. Further, this will likely strengthen the bank’s liquidity position.
Wells Fargo is expected to continue to enhance shareholder value through meaningful capital deployments. It pays out regular dividends on a quarterly basis with the last hike of 20% made in July 2022.
The company also has a share buyback program in place. In first-quarter 2023, it repurchased 86.4 million shares and had 164 million shares remaining under the repurchase authorization. We believe that given its robust capital position and ample liquidity, its capital-deployment activities will boost investor confidence in the stock.
Analysts seem optimistic regarding WFC’s earnings growth prospects. The Zacks Consensus Estimate for the company's 2023 earnings has been revised 1.3% upward in the past 60 days. The company currently carries a Zacks Rank #3 (Hold).
In the past year, shares of WFC have declined 9.3% compared with the industry's fall of 15.2%.
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However, the company's revenue growth has become challenging. The metric witnessed a negative CAGR of 3.9% over the last five years (2018-2022). Though revenues increased in first-quarter 2023, the same may not be replicable in the upcoming quarters. Higher funding costs are expected to impede net interest income (NII) and revenue growth in the upcoming quarters. Management expects a sequential decline in second-quarter 2023 NII.
WFC has continued to register a decline in loans over the past several years on planned run-off from non-strategic/liquidating portfolios. The company’s loans witnessed a negative three-year CAGR (ended 2022) of 0.7%, with the decline continuing in the first quarter of 2023. We expect Wells Fargo’s loan balance to remain disappointing with the asset cap remaining in place until it complies fully with regulators’ demands regarding compliance and operational risk management.
As mortgage rates are expected to remain high in the near future, origination volumes are less likely to witness growth. This is expected to reduce Wells Fargo’s mortgage banking income, which consists of activities such as residential and commercial mortgage originations, sales and servicing. The metric saw a three-year (ended 2022) negative CAGR of 20.1%, with the year-over-year decline continuing in the first quarter of 2023.
Bank Stocks Worth a Look
A couple of better-ranked stocks from the finance space are Pathward Financial, Inc. CASH and First Citizens BancShares FCNCA.
The Zacks Consensus Estimate for Pathward Financial’s current-year earnings has been revised 1.8% upward over the past 60 days. Its shares have gained 6% in the past six months. Currently, CASH carries a Zacks Rank #2 (Buy).
First Citizens BancShares currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised 67% upward over the past 30 days. In the past six months, FCNCA’s shares have rallied 56.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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