2Q First Look: EPS Miss Driven by Impairment Charge
Event:
Wells reported 2Q EPS of $0.74, which slightly missed our estimate of $0.75 and the consensus estimate of $0.80. Relative to our estimate, the miss was driven by a higher provision expense and lower fee income, partially offset by higher net interest income, lower operating expenses, a lower tax rate, and a lower share count.
Bottom line:
As was telegraphed, noninterest income was a headwind in 2Q, but the headwinds should be alleviated in the coming quarters. Its efficient balance sheet drove net interest income and its NIM higher, which, when combined with excellent loan growth, should provide another large benefit to revenue growth in 3Q; the bank increased 2022 NII growth guide. To sum, while the noninterest income shortfall may pressure WFC shares this morning, our bullish thesis remains intact, as we see several positive catalysts for WFC shares playing out in the coming quarters.
Key positives:
NII was above our forecast driven by a 7 bp wider NIM, partially offset by a smaller balance sheet. Operating expenses declined 7.1% from 1Q and were lower than our estimate. Loan growth of 3.5% exceeded our expectation of 1.3% growth. Net charge-offs of $344M were lower than our estimate of $366M. Average diluted shares came in lower than expected, but the bank did not repurchase shares during the final quarter of the 2021 CCAR cycle. It raised its 2022 net interest income growth guide to ~20% growth from mid-teen growth.
Key negatives:
The provision expense was $580M, missing our estimate of $291M in order to support loan growth. Fee income missed expectations driven mainly by a large impairment charge on equity securities (negative $0.08 per share impact to EPS). Deposit balances declined 3.8% from the prior quarter compared to our estimate of flat balances.