We’re downgrading Wells Fargo after back-to-back quarters of disappointment
“Not a great quarter.” That’s how Jim Cramer summed up another lackluster quarter for Wells Fargo on Tuesday. The bank’s total revenue rose 6.4% year over year to $21.45 billion in the first quarter, but fell short of LSEG’s compiled consensus estimate of $21.8 billion. Earnings per share rose 15% to $1.60 in the three months ended March 31, beating the consensus estimate of $1.58. WFC YTD mountain Wells Fargo YTD Wells Fargo Shares tumbled nearly 5% following the announcement; This included shortcomings in certain key indicators in addition to mixed headline figures. As a result, this name headed to the penalty area. We have no choice but to downgrade Club shares to our holding-equivalent rating of 2 and lower our price target per share from $100 to $95. In summary, why not just take the profits and exit? Despite Tuesday’s pullback, we are sitting on the double. While business is definitely not where we were looking for, Wells Fargo’s fundamentals are still moving in the right direction. Management was confident enough to reiterate its outlook for the full year. The team also seemed confident about the bank’s private loan portfolio and investment banking business, which other firms have worried about. “While market conditions may change, the outlook for investment banking remains strong and we entered the second quarter on a strong track driven by mergers and acquisitions and equity capital markets,” CEO Charlie Scharf said on the post-earnings call. He added: “We continue to grow our markets business in a complex and volatile trading environment, with revenue up 19% on a year ago. Client sentiment is cautious but active as macro and geopolitical uncertainty increases and clients largely shift to a more selective and defensive stance.” Revenue may have been missed, but growth was driven by higher levels of both Net Interest Income (NII), the difference between interest earned (loans) and interest paid (deposits), and Non-Interest Income, such as fees and commissions. A 7% reduction in headcount and lower-than-expected provisions for loan losses helped EPS rise. Wells Fargo’s Efficiency Ratio came in slightly higher than expected, but still showed a significant improvement, with a 2 percentage point, or 200 basis point, decline year over year (a lower number is better here). Return on Tangible Equity (ROTCE) rose nicely and managed to beat expectations, with the bank ending the quarter with higher levels of loans and deposits than the Street expected. In particular, end-of-period loan balances exceeded $1 trillion for the first time since the beginning of 2020. Tangible Book Value Per Share (TBVPS) rose 6.5% to $44.98, but that wasn’t quite the level we were looking for. (These three terms are defined in the notes section of the earnings statement below.) The Common Equity Tier 1 Ratio (CET1), which measures risk-weighted assets against capital, came in line with expectations. But the result was right in the middle of management’s stated target range of 10% to 10.5% and was comfortably above the bank’s legal minimum of 8.5%. This means the bank still has enough capital to invest in the business. In this context, Wells Fargo returned $5.4 billion to shareholders in the first quarter; It bought back 46.3 million shares worth $4 billion and paid another $1.4 billion in dividends. Why we own it We acquired Wells Fargo as a turnaround story under CEO Charlie Scharf. And he delivered. His tireless efforts to clean up the bank’s act after a series of bad actions before his tenure paid off when the Federal Reserve lifted the $1.95 trillion asset limit it had imposed in 2018 in early June. Competitors: Bank of America and Citigroup Weight in club portfolio: 3.76% Last purchase: March 17, 2026 Started: January 8, 2021 Private credit risk Before we get into the segments, we want to touch on private credit risk, which has been a big surprise this year. Knowing that many investors, including the club, were concerned about this issue, the team took the time to discuss the issue during the earnings call. Wells Fargo has $210.2 billion in exposure to nonbank financial institutions (NBFIs), which are divided into four groups: asset managers and funds (36%), commercial finance (30%), real estate finance (18%) and consumer finance (16%). “There are inherent risks, but we are comfortable with our exposure based on the profile of borrowers, collateral diversity, our historical loss experience, and our underwriting practices and lending structures,” CFO Mike Santomassimo said during the call. “These loans are often secured at enhanced rates to provide significant margins of protection against expected losses during periods of stress. Additionally, loan structures often include structural protections in the event collateral performance deteriorates.” In total, the bank has $36.2 billion in corporate debt financing, which has attracted the attention of investors. Fortunately, this debt is also well diversified, with mid-single-digit exposures consisting of business services (19%), non-specification (18%), software (17%), healthcare (15%), and the remainder in capital equipment and industrial manufacturing, as well as financials, consumer products and services, non-software IT, and food and beverages excluding restaurants. Wells Fargo noted that the “average borrower concentration on an individual loan” is less than 2%, with more than 98% of the exposure through senior first mortgage loans, meaning they rank high in terms of repayment priority. We left the call confident that Wells Fargo has adequate safeguards to protect itself in the event of further deterioration in private lending. However, we acknowledge that this could be an upside on the stock until the market regains confidence in the overall NBFI industry. This also influenced our decision to downgrade the stock. Segment commentary Retail Banking and Lending recorded 6.6% revenue growth in the first quarter. Revenue streams from credit cards and auto loans increased by 5% and 24%, respectively. Personal loan income fell 1%, while mortgage loan income fell 9%. Before the increase in energy prices due to the Iran war, Scharf said gas represented 6% of total debit card spending and 4% of total credit spending. Each of these levels increased by 1 percentage point. “Consumers have been spending more than a year ahead, including spending more on gas, but they haven’t slowed spending on everything else,” the CEO added. “Historically, we’ve seen it often take several months for consumers to reduce their spending levels in other categories to adjust to higher oil prices,” Scharf said. he explained. “Although we do not know the exact timing, we expect to see the same in the second half of the year. We also expect high energy prices to affect other goods and services. The duration and severity will be determined by the level and duration of high oil prices.” Commercial Banking recorded 7% revenue growth attributable to higher tax credits and equity investments. Corporate and Investment Banking revenue increased the least among operating segments, but still managed to grow just over 4%. Importantly, this growth rate was largely held back by a 21% decline in commercial real estate; This shouldn’t be a huge surprise, as it saw its growth rate negatively affected by the sale of its commercial mortgage servicing business last year. At that time, 236 million dollars were earned from the sale. This allows us to make a difficult comparison from year to year. On the bright side, banking was up 11% due to a 13% increase in both credit and investment banking, as well as a 6% increase in Treasury management and payments. Additionally, market revenues increased by 19%. Wealth and Investment Management saw revenue growth across most of the four segments, up nearly 14%. 2026 forecast Wells Fargo kept its NII outlook for the year unchanged at plus/minus $50 billion; Approximately $48 billion is attributable to non-market activity and another $2 billion may come from net interest income generated by the Corporate and Investment Banking segment. That compares with a FactSet estimate of $50.4 billion. Regarding the assumptions included in the guidance, Santomassimo said on the call: “If interest rates remain higher for longer, we will have to monitor deposit mix trends to see if there is any impact on non-interest-bearing deposits, which could put some pressure on net interest income excluding markets. In terms of interest rates, our outlook assumed two to three cuts by the Federal Reserve. The market is now expecting fewer cuts, which is positive for markets excluding NII, all else being equal. But interest rate expectations are as follows: Interest rates “The cuts were expected to occur later in the year, so if we cut less it would be helpful, but would have only a modest impact on net interest expectations for the year.” It was reiterated that Non-Interest Expenses will be approximately 55.7 billion dollars in 2026. This is pretty much in line with the Street’s predictions. (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. 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