Why Shares of Wells Fargo Are Sinking Today

Core Viewpoint - Wells Fargo's shares fell approximately 5.5% following the release of its second-quarter earnings, despite beating earnings per share (EPS) estimates and slightly exceeding revenue expectations [1][2]. Financial Performance - The bank reported an EPS of $1.60 and total revenue of about $20.8 billion, with EPS surpassing FactSet estimates significantly [2]. - Revenue was slightly higher than analyst estimates, indicating a positive performance in terms of top-line growth [2]. Guidance and Revenue Sources - Management lowered its full-year guidance for net interest income (NII), a key revenue source for banks, which is the difference between interest earned on loans and interest paid on deposits [4]. - The new guidance for 2025 NII is approximately $47.7 billion, consistent with 2024 levels, contrasting with earlier expectations of a 1% to 3% increase from 2024 [5]. - The decline in NII is attributed to lower performance in the bank's markets business, although this is expected to be offset by increased fee income [5]. Market Valuation and Investor Sentiment - Wells Fargo's stock was trading near a five-year high valuation, just under 2 times tangible book value, indicating limited room for error [6]. - Despite the lowered NII guidance, there is a belief that the decline is manageable due to the inherent volatility of NII and the potential for higher fee income to compensate [6]. - Improved credit metrics from the first quarter suggest a favorable environment for large-cap financials, presenting a potential buying opportunity for investors [7].