Will housing boom and rate hikes lift Wells Fargo Q4 earnings?

Wells Fargo [WFC] is expected to report a 73.44% growth in year-over-year earnings and a 2.3% climb in revenues when it reports its fourth quarter figures on 14 January.

According to analysts at Zacks the bank is tipped to reveal quarterly earnings of $1.11 per share and revenues of $18.41bn.

“The operational and cultural changes we’ve made are enabling us to execute with significantly greater discipline than we have in the past,” said chief executive officer Charlie Scharf (pictured above) while detailing third quarter results in October.

Housing Boom

The US’s biggest mortgage lender was buoyed by a strong year for the US housing market with around six million homes sold last year – the best for 15 years, according to CNN figures. Buyers were looking to move in response to the pandemic, with countryside and lakeside properties doing particularly well. The housing shortage also created a surge in prices of around 20% on average.

Zacks said that Wells had also added to its deposits base with its “prudent expense management”, such as streamlining its organisational structure, closing branches and reducing headcount, helping earnings.

“With the solid economic recovery and resumption of business activities,” it added, “the deposit balance is likely to keep improving supporting its liquidity position.

“Normalising credit quality, healthy balance sheet and investment-grade credit ratings are other tailwinds which will support its financials. Its impressive capital deployment plans are sustainable, driven by earnings strength.”

The expected fourth quarter performance compares with a third quarter that saw earnings rise over 90% and revenues down around 2%.

“The operational and cultural changes we’ve made are enabling us to execute with significantly greater discipline than we have in the past” - Wells Fargo CEO Charlie Scharf

In that quarter, consumer lending was down from the same period in the previous year, but demand for its investment banking, corporate and wealth and investment management arms remained strong.

Strong Share Price

Despite that slight wobble in the last quarter, Wells Fargo’s share price has maintained its upward momentum throughout 2021 and into 2022. It has climbed 65% over the last 12 months to sit at $54.77 at the close on 7 January.

It has gained 8% since the start of 2022 boosted by reports of an earlier than expected interest rate hike by the US Federal Reserve to combat higher inflation. This is likely to keep bolstering its share price in 2022.

“A hike in interest rate will raise the cost of funds, which would enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting profits margins,” said Zacks. “As the Fed starts raising interest rates, pressure on margins will gradually alleviate and support banks’ net interest income.”

This will combine with a stronger post-peak pandemic economy to help banks generate more business.

“A hike in interest rate will raise the cost of funds, which would enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting profits margins” - Zacks

Analysts Views

Bank of America [BAC] has picked Wells Fargo as one of the main beneficiaries of these two 2022 drivers. A climb in consumer spending will further support Wells Fargo.

It views Wells Fargo as a “high-quality bank at a good value that may benefit more than other banks from higher interest rates,” reported Go Banking Rates.

According to Market Screener, analysts have a consensus ‘outperform’ rating on the stock. The average target price is $55.77.

JP Morgan [JPM] has a $57 price target on Wells Fargo, although it has a ‘neutral’ rating on the shares.

Analyst Vivek Juneja, said that banks should start 2022 well due to a “sharp surge in commercial and industrial loan growth in late Q4,” according to The Fly. He also describes banks getting a “double benefit” in 2022 from better loan growth in the near term and those rate hikes in the medium term.

Barclays recently upgraded the Wells stock to ‘overweight’ from ‘equal weight’ with a price target of $62, up from $50. Analyst Jason Goldberg likes Wells’ “asset-sensitive” characteristics and believes it is less exposed to the capital markets than its rivals. Goldberg said that Wells should benefit from its expense-saving opportunities and “above average excess capital”.

UBS has a ‘buy’ rating and a $65 price target on the stock stating it has “multiple catalysts”, while Morgan Stanley has a $61 price target. Morgan Stanley analyst Betsy Graseck expects three Fed interest rates hikes this year which, despite higher expenses, could drive up Wells Fargo’s 2023 EPS by 10%.

The bank share prices across the sector will rise after the Omicron wave has passed over the course of the next quarter, Graseck said.