Wells Fargo Q2 preview: Where next for WFC stock?

Josh Warner
By :  ,  Market Analyst

When will Wells Fargo release Q2 earnings?

Wells Fargo is scheduled to release second quarter earnings before US markets open on Friday July 15. The bank will hold a conference call on the same day at 1000 ET.

 

Wells Fargo Q2 earnings consensus

Wall Street expects Wells Fargo to see revenue fall 12.9% year-on-year to $17.6 billion in the second quarter while EPS is forecast to plunge over 38% to $0.85.

 

Wells Fargo Q2 earnings preview

The financial sector is expected to deliver the steepest drop in earnings within the S&P 500 this season, with forecasts from FactSet suggesting we will see, on average, over a 22% drop in profits from the industry compared to a milder 4.1% drop across the entire index.

The 38% drop in EPS for Wells Fargo will primarily reflect tough comparatives from the year before, when earnings exploded thanks to the release of reserves that had been put aside during the pandemic.

Wells Fargo stands out from most of its major peers. The company has a more traditional style of banking concentrated on borrowing and lending, which means it has less exposure to investment banking and trading than its rivals. It is also focused on its domestic operations in the US whilst many of its rivals have businesses sprawled around the world.

Wells Fargo’s focus on lending and its consumer and corporate businesses means it is poised to be among the biggest beneficiaries of higher interest rates that are pencilled in for this year. Markets will be focused on how demand for loans is shaping up as this will ultimately decide how much reward Wells Fargo can reap from higher rates.

Elsewhere, Wall Street believes fees from the likes of mortgages and investment banking will soften in the second quarter, although this should be partly countered by its smaller trading division amid volatile market conditions and strong growth in commercial banking.

Meanwhile, provisions will provide an insight into how confident the bank is feeling about its prospects. Reserves have started to build again across the industry as recession fears grow, but Wells Fargo continued to unwind its allowance for credit losses in the previous quarter and entered the second quarter with the largest level of reserves out of all its major rivals – providing scope for it to bolster its bottom-line with a larger release, or squirrel less away should it feel cautious.

Wells Fargo painted a rosy outlook in the last quarter, supported by growing demand for loans and rising interest rates, prompting it to raise this year’s net interest income target to mid-teens percentage growth from its previous goal of 8%. 

Wells Fargo has so far proven to have a better handle over rising costs across the banking industry, having said it is confident it can cap expenses at $51.5 billion this year and a reiteration of this goal would be welcomed by the markets this week.

Investors have already taken comfort from the fact Wells Fargo performed well in the Federal Reserve’s recent stress tests that evaluate how well individual banks could weather an economic downturn or crash. Having been told it only needs to add an ‘incremental’ amount to its capital buffer, the bank was given the green light and told its already financially stable enough. Analysts forecast Wells Fargo will report a CET1 ratio, which is used to determine how well a bank can cope with a period of financial distress, of 10.4% in the second quarter – although investors will remain wary given the impact higher rates is having on its portfolio of bonds, and therefore its CET1 ratio.

The all-clear provided clarity for the bank, which swiftly announced it was raising its third quarter dividend to $0.30 from $0.25 as a result. Other banks including Goldman Sachs and Morgan Stanley also raised their payouts after performing well in the stress tests, whilst JPMorgan and Citigroup kept their dividends flat after being told they need to redirect more money to improve their capital buffers.

‘Wells Fargo remains in a strong capital position, as confirmed by this year’s CCAR stress test,’ said CEO Charlie Scharf following the stress test. ‘We are well-positioned to support our customers and communities, while also continuing to return excess capital to shareholders through dividends and share repurchases.’

It is worth remembering that Wells Fargo has a unique problem that spans way back to 2018, when the Federal Reserve imposed an asset cap on the company following a string of scandals and failures across the business, from overcharging consumers to having millions of fake accounts on its books. This has prevented the bank from growing its balance sheet over the $1.95 trillion it had back in 2017, which in turn has limited its ability to lend, invest and ultimately grow.

 

Where next for WFC stock?

Wells Fargo shares have fallen some 22% since the start of 2022, but have outperformed other major rivals considering the S&P 500 bank index has slumped by almost 30%.

The stock closed at a 16-month low of $36.50 in mid-June, pushing the RSI into oversold territory and attracting buyers back into the market. This should be treated as the floor for the stock.

Shares have been rising since hitting that low and the uptrend remains intact. The stock should continue to climb toward the 50-day moving average, which has proven to be a tough ceiling over the past three months and currently sits at $45, if it can gain momentum before targeting $45.70 – which proved to be a key level of support-turned resistance and is in-line with the 100-day moving average. Beyond there, the 200-day moving average at $48.50 comes into play. Notably, the 28 brokers that cover the bank believe there is even further potential upside with an average target price of $54.

However, trading volumes have recently declined by a significant amount. The 10-day average volume at time has dropped 24% from the 30-day average and over 36% compared to the 100-day average. This suggests the recent recovery could be losing steam. If we see the stock come under renewed pressure and the 16-month low fails to hold, we could see the stock unravel toward $33.50.

Wells Fargo stock has trended higher since hitting a 16-month low

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