Wells Fargo stock: doing well (NYSE: WFC)

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As other bank stocks plunge in Q4 21 earnings reports, Wells Fargo (NYSE: WFC) reached new multi-year highs. Big Bank remains a turnaround story with confirmation of improving trends as important as the business climate for banks. My investment thesis remains bullish on Wells Fargo at yearly highs.

Improve trends

The big bank reported an impressive net profit of $5.8 billion in the fourth quarter of 2021 on EPS of $1.38. Wells Fargo had net income of $21.5 billion in 2021, which was incredible for the bank almost left for dead.

Of course, Q4’21 results were boosted by one-time asset sales which increased EPS by $0.18 and lower provision for credit losses which increased EPS by an additional $0.17. . In total, Wells Fargo had non-GAAP EPS of about $1.03, or $1.08 excluding the $0.05 railcar impairment charge.

Either way, the market entered 2021 not expecting Wells Fargo to generate such strong profits until it completed the restructuring and removed the asset cap. The bank is now entering 2022 with these additional tailwinds to further increase its profits.

Crucial non-interest spending fell only marginally to $13.2 billion from third-quarter 2021 levels. Wells Fargo built on spending cuts from previous quarters, but the big bank did not make big strides in Q4’21, still leaving the efficiency ratio at a high 63%.

Wells Fargo Q4

Source: Wells Fargo Q4’21 presentation

The headlines of the day were JPMorgan (NYSE: JPM) guiding the 2022 spending forecast up 8%. The market did not expect the banking leader to increase spending by $6 billion during the year despite strong revenue trends.

Wells Fargo is still in cost-cutting mode, and the good news is that the bank doesn’t expect inflation to jeopardize those plans. The bank forecast spending of $51.5 billion for 2022, up from $53.8 billion in 2021.

Wells Fargo has long announced plans to cut $10 billion in costs after the bank only made $4 billion last year. The market certainly did not expect the big bank to continue cutting costs in this inflationary environment.

Combined with an 8% increase in NII in 2022, Wells Fargo is quickly set up for a revenue boost while costs fall by $2.3 billion next year. The bank had an NII of $36 billion in 2021 and an 8% increase in 2022 equates to about $3 billion in additional NIIs this year. Remember that the bank will still be below 2020 levels.

Wells Fargo Q4

Source: Wells Fargo Q4’21 presentation

Big EPS boost

Anyone doing simple math realizes that a $2.3 billion reduction in expenses combined with a $3.0 billion increase in revenue provides a nice $5.3 billion increase in net income (before to account for taxes). With 4.16 billion shares outstanding, Wells Fargo would increase EPS by more than $1 per next share in this simplistic calculation.

The big bank spent $7 billion on share buybacks in the last quarter to repurchase 140 million shares. The number of shares should end much lower next year, with the bank buying up to 10% of outstanding shares on an annual basis, unless the stock rallies too much here.

As my previous research has pointed out, Wells Fargo is on course to achieve $6+ EPS down the road. Analysts incorrectly forecast 2022 EPS to fall below $4, while this updated guidance along with Q4’21 earnings should take analysts up to $5 per share in 2022.

Data by YCharts

All of these numbers are even before Wells Fargo removed the asset cap. The combination of an improved efficiency ratio, a higher NII thanks to improving rate trends and a lower number of shares is too powerful a trend to predict that the big bank will not see. a huge boost from the average EPS of $4 in 2021. The removal of the asset cap is just an added bonus going forward.

To take with

The main takeaway from investors is that Wells Fargo remains far too cheap here. The big bank confirmed the major tailwinds already predicted to boost EPS going forward and the market is just seizing on these trends. As analysts estimate EPS to top $5 in 202, the stock will continue to climb.

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