Wells Fargo (WFC) has been trying to simplify the bank's mortgage business for several years now. Tuesday evening, the firm announced a paring down and refocusing of that business.
Wells Fargo says that it will exit the correspondent business and reduce the size of the bank's servicing portfolio in order to create a narrower, but more highly focused home lending business. That's not all. In addition, broader plans include:
- Optimization of the retail team to focus on bank customers and underserved communities.
- Broadening of the bank's existing $150M investment from its special purpose credit program to include purchase loans.
- Investing $100M to advance racial equity in homeownership. Investment in this space will be an ongoing commitment for years to follow.
- Deployment of additional home mortgage consultants in local minority communities.
While this news was indeed new, Wall Street has been expecting something along these lines since August when Bloomberg News reported that Wells Fargo was planning to pare down its mortgage business and no longer drive efforts to be the nation's leader in that business.
Wall Street Is Okay
On Tuesday, Odeon Capital's four star rated (by TipRanks) analyst Richard Bove upgraded WFC to a "buy" rating with a $51.79 (odd) target price. On Wednesday morning, Morgan Stanley's four star rated analyst Betsy Graseck reiterated her "buy" rating on WFC and her $58 target price. Graseck noted that the bank exiting from the correspondent business "doesn't move the EPS needle."
Wells Fargo agreed to pay a civil penalty of $1.7B in a settlement with the CFPB (Consumer Financial Protection Bureau) over matters related to fees and interest charges on auto loans, mortgage loans, and consumer deposit accounts. The CFPB also ordered Wells Fargo to pay more than $2B in redress to its customers. As a result, the CFPB terminated its August 20th, 2016 consent order to Wells Fargo's student loan servicing business.
This charge will be recorded as a non-operating expense, and as such will not be included in the firm's adjusted financial performance for the fourth quarter. However, this certainly can and probably will impact the bank's ability to return capital to shareholders.
The bank is still left facing a number of consent orders, primarily the February 2nd 2018 Federal Reserve Board consent order regarding governance oversight and operational risk management. This is the order that prevents Wells Fargo from growing assets beyond $1.95T. This order stays in place until the Fed is fully satisfied with the bank's reform plan. Wells Fargo may have to make progress in resolving up to five other consent orders in order to convince the Fed to remove that cap. Educated estimates put that possibility out as far as next year.
Wells Fargo will report the firm's fourth quarter financial results this Friday morning. Wall Street is looking for GAAP EPS of $0.60 with a range spanning from $0.45 to $0.85. Adjusted EPS is seen in between $1.15 and $1.20. The firm is expected to have driven just less than $20B in revenue. The range of expectations there runs from $19.4B to $20.5B. At consensus this would be a year over year revenue contraction of 4%.
While the call will likely include an explanation of the nonoperating charge as well as last night's moves made regarding the bank's mortgage business, Wall Street's key takeaway will likely be the number for net interest income. The reason most investors are in Wells Fargo, or at least the reason that I am in WFC, is that this is a traditional bank with a large consumer banking business. This is not a boutique. It certainly is not a leading investment bank or brokerage. The bread is buttered here by net interest income (NII), which is created by net interest margin.
This is expected to be a bright spot fortunately for the fourth quarter. Expectations are for almost $13B of NII which would be up about 40% year over year and even up sequentially from what was a solid (at least for NII) third quarter.
I have been in Wells Fargo since the Fed started talking about raising rates in autumn of 2021. I have already taken profits on the vast majority of my position, but I am not flat. I am still long about one-fourth of my early 2022 position.
My only banking longs going into earnings season are WFC and Bank of America (BAC) , basically because these two banks are domestic, are focused on traditional banking and are led by CEOs (Charles Scharf and Brian Moynihan) that I think highly of. So, what now?
Readers will see that WFC has been stuck in a rising channel since bottoming in June. The shares have recently sunk toward the lower trendline of that channel and have traded below both the 50 day and 200 day SMAs (simple moving average) since early December. The apex of that channel so far came at a rough 50% retracement of the entire February through June selloff. This came after the first rally off that selloff met resistance at a rough 38.2% retracement.
Does that mean that WFC is primed for a bit of a rally? Would that put the 61.8% retracement level at $50 in the crosshairs? It could, depending on net interest income, and on how well Scharf handles the conference call.
I am probably going to bring my long position back up to 1/3 of my previous peak for share count ahead of Friday's release. I would like to add that tranche around the 21 day EMA (exponential moving average). The 50 day and 200 day EMAs are bunched and could present as massed resistance unless taken in response to earnings. If I do not get my price, I can take a pass. I don't want to add just below those two averages.