One of the largest investment banks in the US Wells Fargo (WFC.US) today released its financial results for Q1 2022, which turned out to be not good enough to change the current sentiment around the banking sector:
- Earnings per share beat analysts’ expectations: $0.88 vs $0.81
- Wells Fargo earned nearly $3.67 billion in Q1 vs $4.64 billion in 2021, a roughly 21% decline;
- Wells Fargo signed the most mortgage loans of any bank in the US in 2021;
- Mortgage originations were down 27% from 2021. JPMorgan said in a report yesterday that its mortgage originations fell 37%. Wells Fargo CEO Charlie Scharf plans to tightly control the bank’s costs, will still try to stem mortgage origination declines;
- Revenue fell slightly: $17.59bn vs $18.53bn a year ago. This represents a roughly 5% decline; analysts’ forecasts pointed to roughly $17.78 billion in revenue. Wells Fargo simultaneously released $1.09bn to cover any losses;
- Net interest income, which is a measure of profit from lending activities, rose 5% to $9.22 billion which can be seen as a positive outlook for the future. In January 2022, Wells Fargo management estimated that net interest income could rise as much as an additional 8% if the Fed raises interest rates three times in 2022. Investors, meanwhile, expect nine to 10 rate hikes of 0.25 bps according to CME Group. This gives hope for a ‘pullback’ in the market and an improvement in Wells Fargo’s profitability in 2022;
- Outstanding loan commitments rose 6% from 2021 and 2% from Q4 2021.
- Concerns continue to grow around the recession scenario caused by the Federal Reserve’s turnaround in monetary policy. Weaker performance in the banking sector may herald the end of the bull market for banks that took place during the pandemic era where a growing real estate, mortgage and consumer credit market drove bank profits and turnover.
- Rising energy costs and inflation in the services and goods sectors could become risk factors, which for some US citizens and businesses could mean insolvency and closure. Credit applications are also falling. Last week, the number of mortgage applications for US properties fell by 6.4% compared to the same period in 2021 according to the Mortgage Bankers Association. It is worth bearing in mind that some of the major banks’ valuations have not yet surpassed their pre-pandemic peaks.
- At the same time, higher loan repayments caused by raising rates could give banks unprecedented returns on their lending and fuel their business. To date, returns on lending by banks have not been significant due to historically low interest rates. The US economy appears to be still in good shape, which means that borrowers should be able to cover their liabilities. It is worth bearing in mind that some of the largest banks are still trading below their pre-pandemic coronavirus price peaks.
At the same time, analysts at CitiGroup changed their recommendation for Wells Fargo from ‘Hold’ to ‘Buy’ today.
Wells Fargo (WFC.US) chart, H4 interval. At the open, the share price is testing major support around $45.00, which coincides with 38.2 according to Fibonacci retracement of the upward wave launched in October 2020. Potential short-term resistance is still the 50-session moving average (green line) and the SMA 200, the crossing of which could herald a trend reversal. In the meantime, however, price respects the downward trendline which suggests the predominance of sellers’ strength. If buyers manage to halt declines around aforementioned support at $45.00, an upward impulse towards local resistance at $50.00 may be launched. Source: xStation5