5 Things to Consider Ahead of Wells Fargo’s (NYSE:WFC) Q2 2024 Results

In the three months since the release of its first-quarter results, Wells Fargo & Company (New York Stock Exchange: WFC) was trading in a tight range. WFC stock was trading between $57.00 and $61.00, struggling to break above $60. Despite a strong quantitative rating of 4.95 out of 5.0Markets are looking for positive catalysts that would justify a rally.

What should shareholders expect from the second-quarter earnings report? There are five things to consider ahead of the company’s second-quarter earnings report, which is scheduled for Friday. The company will report alongside peers Citigroup (C), BNY Mellon (BK) and JPMorgan Chase (JPM) that day, before markets open.

1/ Results for the 1st quarter of 2024

Wells Fargo met Wall Street consensus estimates in the first quarter. It posted good credit quality, a provision for credit losses (PCL) that fell well short of estimates, and strong earnings. The bank earned $1.20 per share, compared with $1.23 a share year-over-year. Excluding a special assessment from the FDIC, first-quarter earnings would have been $1.26, well above analysts’ average estimate of $1.09.

The provision for credit losses of $938 million was down from $1.28 billion in the fourth quarter, but higher than the $1.21 billion reported in the first quarter of 2023. This contrasts with the struggles at Canadian banks. Bank of Nova Scotia (BNS) reported higher provisions for credit losses, citing uncertain macroeconomic conditions. It also blamed the impact of persistently higher interest rates on various customer segments. Bank of Montreal (BMO) posted a significantly higher provision for credit losses of C$705 million, compared with C$318 million a year ago.

Wells Fargo reported lower net loan losses from auto losses in the quarter, reflecting tightening measures implemented beginning in late 2021.

During the quarter, net interest income fell $1.1 billion, or 8% year-over-year. Rising interest rates negatively impacted funding costs as customers shifted to higher-yielding deposit products while reducing their loan balances.

After the government recorded the lowest level of wage growth in more than a year, the Federal Reserve will more easily cut interest rates by 25 basis points during 2024. That should boost Wells Fargo’s net interest margins in the coming quarters.

2/ Increase in dividends and share buybacks

After passing the Federal Reserve’s 2024 stress test, Wells Fargo said it expects its capital stress buffer to be 3.8%. Given that its capital will exceed the minimum regulatory capital requirements, the company plans to increase its dividend by 14% to $0.40 per share. Based on a closing price of $59.62, the dividend will have a forward yield of 2.68%. By comparison, BMO shares pay a dividend that yields 5.31%. Scotiabank pays a dividend that yields 6.85% annually. Its yield has increased after the stock fell from a high of $51.98 in April 2024 to $45.21 recently.

Wells Fargo will also boost shareholder returns by buying back shares. That program will begin in the third quarter of 2024 and continue through the second quarter of 2025. Investors will have to wait until Friday’s report to learn the full extent of the buyback program.

3/ Second quarter results forecasts

In the second quarter, 19 analysts upgraded their estimates for Wells Fargo’s earnings per share. This gives WFC stock a B+ rating.

Consensus EPS is $1.28, up 2.69% year-over-year. The modest upside expectation suggests Friday’s earnings release won’t move the stock. Over the past quarter, WFC was already the third-best performing bank stock of 2024. Still, it has outperformed Citigroup, JPMorgan, and Bank of America (BAC).

Investors who held the SPDR S&P Bank ETF (KBE), however, are nearly at breakeven in 2024. WFC stock is not among the top holdings. The First Trust Nasdaq Bank ETF (FTXO) is an alternative holding. Wells Fargo has a weighting of 8.21%. Invesco KBW Bank (KBW) is a better choice. Its assets under management are $1.53 billion. JPMorgan, Goldman Sachs (GS), Morgan Stanley (MS), Bank of America, and Wells Fargo each account for at least 8% of assets or more.

4/ Wells Fargo stock ratings

Wells Fargo and Bank of America both have a strong quantitative buy rating. All four U.S. banks have nearly identical year-to-date returns of 20% or more. I included the two Canadian banks in the comparison since I compared their PCL to Wells Fargo’s earlier in the article.

Wells Fargo performs poorly only in terms of valuation. Like BAC stock, it performs well in terms of growth, profitability, momentum and EPS revisions.

The valuation rating system appears to penalize Wells for its 2.35% dividend yield. However, once the dividend hike boosts the yield, the valuation rating should improve to C+. This would be in line with Citi’s Value rating.

5/ Risks

The bank cited long-standing issues as among the upcoming regulatory pressures. In addition, the implementation of enhanced controls and oversight could lead to regulatory action. In addition, it has ongoing litigation, regulatory matters and customer remediation issues that could contribute to operating losses.

The company could offset these risks by offering its customers more low-risk financing products. This would improve its deal flow in the coming quarters.

Your takeaway

Investors have no reason to change their optimistic outlook on Wells Fargo. The bank has raised its dividend and will buy back shares. This adds to the stock’s appeal, especially as the Fed prepares to cut interest rates this year. After building support around $40 since 2021, the uptrend that began in November 2023 is unlikely to end. Helped by strong quarterly results, this paves the way for a rally to over $65, a price not seen since January 22, 2018.