Wells Fargo Earnings Don’t Warrant Selloff in WFC Stock

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Wells Fargo (WFC) earnings were just fine on the top and bottom lines, but the market quibbled with some of what came in between, sending WFC stock lower in midday Friday trading.

Although Wells Fargo earnings per share rose to match Wall Street’s estimate — and revenue beat expectations by declining less than forecast — a key measure of Wells Fargo profitability continued to slip, and that was enough to ding WFC stock.

That doesn’t really affect the trajectory of WFC, however, which should continue to grind higher — at least as long as the market does.

Shares were up a market-beating 14% for the year-to-date heading into the Wells Fargo earnings release, but the immediate pullback on the earnings report doesn’t change the thesis.

WFC stock is a must-own if you’re bullish on the economy and the market. After all, Wells Fargo represents the nation’s largest mortgage lender and biggest bank by market cap.

It’s hard to see either the economy or the market going anywhere without WFC participating.

Wells Fargo Earnings – Nitpicking Over NIM

For the most recent quarter, Wells Fargo earnings rose 3.8% to $5.73 billion, or $1.01 a share, from $5.52 billion, or 98 cents, a year earlier. As noted above, earnings matched Street estimates. Revenue, meanwhile, slipped 1.5% to $21.07 billion, beating the Street view for a drop to $20.84 billion.

There were no big surprises in the broad strokes of the Wells Fargo earnings release. Revenue has been sluggish because higher interest rates pinched off the mortgage refinancing boom some time ago. Home lending originations totaled $47 billion in the second quarter, down from $112 billion booked a year ago.

Additionally, Wells Fargo earnings aren’t getting the same goosing from the release of loan-loss reserves as they once did because credit quality has improved to the point where it’s pretty much topped out. No surprise there, either.

That left the Street to worry about the nitty-gritty of basic banking, where rising costs and lower margins remain a Wells Fargo bugaboo.

For years now, historically low interest rates have made it tough for Wells Fargo earnings to show an improvement in net interest margin, or NIM. (That’s the bread-and-butter difference between what a bank pays for deposits and charges for loans.)

It’s tough to grow net interest margin when benchmark rates are plumbing the depths.

However, rates are no longer stuck at ultra-depressed levels, yet Wells Fargo earnings still showed contraction in this key measure of profitability. Indeed, Wells Fargo net interest margin fell to 3.15% vs. 3.4% year-over-year, and from 3.2% in the prior quarter.

If there was a blemish on the Wells Fargo earnings report, this was it.

Bottom Line

In the grand scheme of WFC stock, recalcitrant net interest margins amount to a pimple — not psoriasis. That makes the pullback in WFC stock more of a buying opportunity than a signal that’s something wrong.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.