How Should Investors Play Wells Fargo Stock Ahead of Q4 Earnings?

Core Viewpoint - Wells Fargo is expected to report its fourth-quarter 2024 results on January 15, 2025, with a consensus estimate for revenues of $20.61 billion, indicating a 1.23% year-over-year decline [1][2]. Financial Performance - The third-quarter performance was supported by higher non-interest income, but net interest income (NII) saw a decline [2]. - The consensus estimate for earnings for the upcoming quarter has been revised slightly upward to $1.34, reflecting a 3.9% increase from the prior-year quarter [3][4]. - Wells Fargo has a history of earnings surprises, with an average surprise of 12.54% over the last four quarters [6][7]. Factors Influencing Q4 Results - The Federal Reserve's recent interest rate cuts are expected to support Wells Fargo's NII, which is projected to be around $11.67 billion, consistent with the previous quarter [8][9]. - Mortgage rates have increased slightly to 6.8%, impacting refinancing and origination volumes, with mortgage banking revenues estimated at $269.4 million, a 3.8% decline from the prior quarter [10][11]. - Investment banking fees are expected to benefit from improved global M&A activity, with estimates pegged at $667.5 million [12][13]. Expenses and Asset Quality - Costs are anticipated to rise due to investments in technology and digitalization, potentially hindering bottom-line growth [15]. - The consensus estimate for total non-accrual loans is $8.51 billion, indicating a 4.2% sequential rise, while non-performing assets are estimated at $8.65 billion, a 3.2% increase [16]. Investment Thesis - The potential lifting of the $1.95 trillion asset cap could significantly enhance Wells Fargo's lending capabilities and support long-term growth [24][25]. - The bank is implementing cost-cutting measures to improve operational efficiency, including branch closures and workforce reductions [26]. - Shareholder returns are being prioritized, with a recent 14% dividend increase and a $30 billion share repurchase program [27]. Market Position and Valuation - Wells Fargo's shares have outperformed industry peers and the S&P 500, trading at a forward P/E of 12.99X, below the industry average of 14.06X, indicating a potentially attractive valuation [20][22]. - The improving loan demand and lower interest rates present a positive outlook for the bank as it approaches its earnings announcement [31].