At a recent conference, Wells Fargo (WFC -1.47%) Chief Financial Officer Mike Santomassimo told investors they expect mortgage bank revenue to fall about 50% in the second quarter of this year from the first quarter. The news isn’t terribly surprising given the drop in mortgage activity due to rapidly rising interest rates, but it’s still concerning because Wells Fargo is a major mortgage lender.
Given this news and given everything going on in the market right now, is it time to buy or sell Wells Fargo? We’ll take a look.
Does a drop in mortgage lending harm the bank’s strategy?
It’s not just Wells Fargo. Mortgage activity has plummeted across the industry due to soaring mortgage rates, which have recently started to hit 6% and above. The Mortgage Banker’s Association recently reported that total application volume last week fell nearly 53% compared to the same week in 2021. Overall, mortgage bank revenue was about 4% of total mortgage revenue. Wells Fargo in the first quarter of this year and nearly 12% of total revenue in 2021.
But the bank’s broader strategy appears to be moving forward. At the conference, Santomassimo said the bank was still pleased to have met its spending target of $51.5 billion for the year, which would be about $2.3 billion lower than that of 2021. Wells Fargo is in the midst of a multi-year effort to cut spending by $10 billion. . “I think there are opportunities everywhere,” Santomassimo added when asked about future spending cuts.
On the revenue side, although mortgage banking was down, Santomassimo said the bank’s revamped credit card business continued to grow. Not only has growth outpaced the industry this year, but the quality of borrowers is better than the bank had expected. Santomassimo said the bank will likely expand its credit card offerings as well. And then on net interest income (NII), the profits banks make on loans, securities and cash after covering the cost of funding those assets, Santomassimo reiterated that the bank still expects whether the NII increases in the mid-teen percentage range from 2021, and that may depend more on how everything plays out at the Federal Reserve.
And then, at some point, I would expect Wells Fargo to end up removing a government-mandated asset cap that has obsessed the bank for more than four years now. The Fed placed the cap on the bank in 2018 as punishment for its fake accounts scandal, in which employees opened credit cards and bank accounts for customers without their consent. The asset cap prevents Wells Fargo from growing its balance sheet beyond $1.95 trillion in assets, which has really squeezed its profits in recent years. It’s unclear when the cap will be removed, but the bank has made progress and appears to be on track to remove the asset cap.
Buy or sell Wells Fargo?
Although mortgage banking is being hit hard, the benefits of the NII should be more than enough to offset the impact. Wells Fargo also continues to make progress on its spending and efficiency initiatives and is finding revenue opportunities in other areas such as credit cards. The bank is well capitalized and may be able to repurchase more shares later this year if things calm down, although Santomassimo said the bank did not repurchase any shares during the quarter due to all the volatility. .
Finally, the stock price has fallen almost 25% this year and is currently trading at around 116% of its tangible book value, or net worth, and around nine times forward earnings. I think this is an attractive valuation given that the bank has a good strategic orientation. Therefore, I would say Wells Fargo is a buy.