We’re downgrading Wells Fargo after back-to-back quarters of disappointment
“Not a great quarter.” That’s how Jim Cramer on Tuesday summed up another lackluster quarter from Wells Fargo. Total revenue at the bank increased 6.4% year over year to $21.45 billion in the first quarter, but it fell short of the LSEG compiled consensus estimate of $21.8 billion. Earnings per share for the three months ended March 31 rose 15% to $1.60, edging out the $1.58 consensus estimate. WFC YTD mountain Wells Fargo YTD Shares of Wells Fargo sank nearly 5% after the release, which, in addition to the mixed headline numbers, also featured misses on certain key indicators. As a result, this name is headed to the penalty box. We have no choice but to downgrade the Club stock to our hold-equivalent 2 rating and cut our price target to $95 per share from $100. Bottom line Why not just take the win and exit the stock? Even with Tuesday’s pullback, we’re sitting on a double. While things certainly weren’t to the level we were looking for, the fundamentals at Wells Fargo are nonetheless trending in the right direction. Management was confident enough to reiterate its outlook for the full year. The team also sounded confident regarding the bank’s private credit portfolio, an area of concern at other firms, and its investment banking business. On the post-earnings call, CEO Charlie Scharf said, “While market conditions can change, the outlook for investment banking remains strong, and we entered the second quarter with a strong pipeline driven by M & A and equity capital markets.” He added, “We continue to grow our markets business amid a mixed and volatile trading environment, with revenue up 19% from a year ago. Client sentiment is cautious, but engaged as macro and geopolitical uncertainty has increased and clients have largely shifted to a more selective and defensive posture.” Revenue may have missed, but growth came thanks to higher levels of both Net Interest Income (NII), the difference between interest earned (loans) and interest paid (deposits), and Noninterest Income , such as fees and commissions. Helping to drive the EPS beat was a 7% reduction in headcount and lower than expected provisions for credit losses. Wells Fargo’s Efficiency Ratio came in a bit higher than expected, but still indicated significant improvement, with a year-over-year decline of 2 percentage points, or 200-basis-points (a lower number is better here). Return on Tangible Common Equity (ROTCE) increased nicely, managing to edge out expectations as the bank closed out the quarter with a higher level of loans and deposits than the Street was anticipating. Notably, end-of-period loan balances exceeded $1 trillion for the first time since the start of 2020. Tangible Book Value per Share (TBVPS) increased 6.5% to $44.98, but that was not quite to the level we were looking for. (These three terms are defined in the notes section of the earnings table below.) Common Equity Tier 1 Ratio (CET1) , which measures capital versus risk-weighted assets, came in light of expectations. However, the result was right in the middle of the management’s stated 10% to 10.5% target range and remains comfortably above the bank’s 8.5% regulatory minimum. That means the bank still has plenty of available capital to invest in the business. On that note, Wells Fargo returned $5.4 billion to shareholders in the first quarter — buying back 46.3 million shares worth $4 billion and paying out another $1.4 billion in dividends. Why we own it We bought Wells Fargo as a turnaround story under CEO Charlie Scharf. And, he has delivered. His tireless efforts to clean up the bank’s act after a series of misdeeds before his tenure paid off when the Federal Reserve lifted its 2018-imposed $1.95 trillion asset cap in early June. Competitors : Bank of America and Citigroup Weight in Club portfolio : 3.76% Most recent buy : March 17, 2026 Initiated : Jan. 8, 2021 Private credit exposure Before digging into the segments, we want to touch on private credit exposure, which has been the cause of a lot of consternation this year. Knowing that many investors, including the Club, are concerned about this, the team took time during the earnings call to discuss it. Wells Fargo has $210.2 billion exposure to non-bank financial institutions (NBFIs), which fall into four buckets — asset managers and funds (36%), commercial finance (30%), real estate finance (18%), and consumer finance (16%). On the call, CFO Mike Santomassimo said, “There are inherent risks, but we are comfortable with our exposure based on the profile of borrowers, the diversity of collateral, our historical loss experience, and our underwriting practices and lending structures.” He added, “These loans are generally secured with advanced rates to provide significant margins of protection against expected losses during periods of stress. And the lending structures often include structural protections if collateral performance deteriorates.” Included in the total, the bank has $36.2 billion in corporate debt financing, which has garnered the bulk of investor attention. Fortunately, that debt is also well-diversified, with business services (19%), nonspecificed (18%), software (17%), health care (15%), and the rest consisting of mid-single digit exposure to capital equipment and industrial production, as well as financials, consumer products and services, non-software IT, and food and beverage, excluding restaurants. Wells Fargo noted the “average obligor concentration in an individual facility” is less than 2%, with more than 98% of the exposure via senior first lien loans, meaning that they sit high up in terms of the priority for repayment. We left the call feeling confident that Wells Fargo has adequate protections in place to protect itself in the event of further deterioration in private credit. Nonetheless, we acknowledge that this could be an overhang on the stock until the market regains confidence in the overall NBFI industry. That also figured into our decision to downgrade the stock. Segment commentary Consumer Banking and Lending saw first-quarter revenue increase 6.6%. Revenue streams from credit cards and auto loans were up 5% and 24%, respectively. Personal lending revenue fell 1% while home lending revenue was down 9%. Before the spike in energy prices due to the Iran war, Scharf said that gas represented 6% of total debit card spending and 4% of total credit spending. Those levels each rose 1 percentage point. “Consumers are spending more than a year ago, which includes spending more on gas, but they haven’t slowed spending on everything else,” the CEO added. “We have seen historically that it often takes consumers several months to reduce their spend levels on other categories to adjust for higher oil prices,” Scharf explained. “While we don’t know the exact timing, we would expect to see the same in the second half of the year. We also expect that higher energy prices will impact other goods and services. The duration and severity will be driven by the level and duration of higher oil prices.” Commercial Banking saw revenue advance 7%, attributable to higher tax credit and equity investments. Corporate and Investment Banking revenue was up the least of the operating segments, but still managed to grow a little over 4%. Importantly, that growth rate was largely held back by a 21% decline in commercial real estate, which shouldn’t come as a huge surprise, as it saw its growth rate negatively impacted by the sale of the commercial mortgage servicing business in the year-ago period. At the time, the sale resulted in a gain of $236 million. That makes for a tough year-over-year comparison. On the bright side, banking was up 11% due to a 13% increase in both lending and investment banking, as well as a 6% increase in Treasury management and payments. Additionally, markets revenue increased 19%. Wealth and Investment Management saw revenue increase the most of the four segments, increasing nearly 14%. 2026 guidance Wells Fargo kept its NII outlook for the year unchanged at plus/minus $50 billion, with about $48 billion attributable to non-markets activity and another $2 billion coming from net interest income generated by the Corporate and Investment Banking segment. That compares to the $50.4 billion FactSet estimate. Regarding assumptions baked into the guide, Santomassimo said on the call, “If interest rates stay higher for longer, we will have to monitor deposit mix trends to see if there’s any impact on noninterest-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 currently expects fewer cuts, which, all else being equal, is positive for NII-excluding markets. However, interest rate expectations are constantly changing. The rate cuts we assumed were expected to occur later in the year, so if we get fewer cuts, it would be beneficial, but would only have a modest impact on this year’s net interest expectations.” Noninterest Expenses in 2026 were also reiterated to be about $55.7 billion. That’s about in line with Street estimates. (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber 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 trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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