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Wells Fargo: Strong Earnings, but Is the Bank Ready to Move On?

Matthew Frankel, CFP, The Motley Fool

Earnings season is just getting underway, and investors have been nervous about the first quarter's numbers. However, Wells Fargo (NYSE: WFC), one of the first companies to report results, just helped start the season off on a high note.

Not only did the bank beat on both the top and bottom lines, but the numbers look strong throughout the report, indicating that Wells Fargo might be successfully moving past its numerous scandals of the past few years. In fact, with numbers like these and a soon-to-be-hired new CEO, the bank could finally be ready to turn a corner.

Exterior of a Wells Fargo banking branch.

Image source: Wells Fargo.

The headline numbers

While the top- and bottom-line numbers rarely tell the whole story of how any company is performing, they're still important to know, as they can be a good indicator of the overall theme of the report. Wells Fargo didn't disappoint in that regard.

On the bottom line, Wells Fargo earned $1.20 per share versus analyst expectations of $1.09. On an annualized basis, this means that the stock is now trading for just 10 times earnings, an extremely cheap valuation for the bank historically.

Top-line revenue was even more impressive, with the $21.61 billion figure coming in nearly $600 million more than analysts had expected. That's a big positive surprise.

Looking a little deeper

As I mentioned, the headline numbers tell only part of the story, so let's dig a little deeper. Here are some of the key points investors should know about Wells Fargo's first quarter:

  • Wells Fargo's loan portfolio slightly missed expectations, but the bank's deposits dropped by less than analysts had projected. This could be an indicator that the scandals aren't costing the bank as much business as initially feared.
  • Return on assets (ROA) of 1.26% and return on equity (ROE) of 12.71% are well above industry benchmarks and are in line with the bank's historical averages.
  • Net charge-offs and delinquent loans both declined for the quarter, indicating continued strong asset quality.
  • Net interest margin increased by 7 basis points year over year, which indicates that higher market interest rates are translating into better profitability.
  • The bank spent $6 billion on dividends and buybacks, with about two-thirds of this amount being spent on the latter. This means that Wells Fargo spent about $4 billion to take advantage of its depressed share price, which could add significant shareholder value over the long run. In fact, over the past year, Wells Fargo's share count has declined by 7%. That's an aggressive buyback.

Strong numbers and a new CEO could be a winning formula

Combined with the recent departure of CEO Tim Sloan and the subsequent announcement that the bank was searching for an external candidate to take his place, Wells Fargo's first-quarter earnings are great news for the bank's investors.

Above-average ROA and ROE are the type of profitability figures we expect to see from Wells Fargo, and it appears that asset quality remains strong and the loss of business due to the bank's numerous scandals remains low. If the bank's next CEO can convince the Federal Reserve to lift its penalty and allow the bank to grow again, Wells Fargo's unfortunate past few years could become a distant memory sooner than you might think.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.