The big banks kicked off the fourth quarter earnings season in earnest Friday morning. It wasn’t one of those booming kicks that fly from the back of the end zone. Rather, it was a punch in the wind that flirted with the rebound out of bounds and left the attacking opponent in a decent field position. If you know what I mean. Oh, JP Morgan (JPM) snatched the cover off the ball, like JPM Morgan is inclined to do. Stock trading was awesome. Fixed income trading performed well. Investment banking was even better than trading. Wealth Management and Commercial Banking have at least done their part. Consumer banking was down, however, and provisions for credit losses were printed above expectations.
Traders sold JPM on the news. They sold the whole group. I got into long JPM, and even with the hits this morning, I’m still up almost 40% on this investment. However, I also came to Wells Fargo (WFC) along, and I was just kinda on that one. Uh oh. Alright, let’s go.
Wells Fargo Reports
First, there is a lot going on here. Why am I even in the name? Basically, to believe that CEO Charles Scharf is the right leader to turn this bank around, control spending, refine the direction of the business, increase transparency both to the public and to regulators, and simply restore the reputation of a big bank.
For the review period, Wells Fargo posted Adjusted EPS of $ 0.70, which was a solid beat, as well as GAAP EPS of $ 0.64, also a beat. Income generation, however, was a sore point. Revenue hit $ 17.9 billion, down nearly 10% year-over-year, and missed the mark by around $ 100 million.
The whole story becomes complex. As we know, Scharf is trying to get rid of non-core activities in order to refocus the business. On Thursday (yesterday), Wells Fargo announced the sale of its Canadian direct equipment financing business to the Toronto Dominion Bank (TD). No conditions were announced. In December, Wells Fargo agreed to sell the company’s private student loan portfolio. Also Thursday, Reuters reported that Wells Fargo was in talks to sell its asset management business, with holdings valued at $ 607 billion to a group led by GTCR LLC and Reverence Capital Partners. Word is, WFC is asking over $ 3 billion for the unit. Most readers probably noticed the UBS upgrade earlier this week, citing Scharf’s efforts to become a more efficient bank.
Back to the earnings report. I’ll tell you what I really liked. The company was able to reduce loan loss provisions to $ 179 million from $ 769 million last quarter, largely due to this sale of the student loan portfolio. Now what the street doesn’t like very much. Average deposits were flat at $ 1.4 trillion, while average loans fell to $ 899.7 billion from $ 931.7 billion last quarter. It’s getting worse and worse, and it’s a big deal. Fourth-quarter net interest income was $ 9.28 billion, which is lower than estimates of over $ 9.4 billion. Wells Fargo also showed this morning that for fiscal 2021, the company expects net interest income to print flat at -4%. Remember, because this company had to come out of a hole on its own, it had to offer “above market” promotional interest rates on deposits in order to attract and hold funds.
Readers will note that the December 2019-May 2020 sell-off and the June 2020-November sell-off produced rebounds that hit solid brick walls of resistance with near 38.2% accuracy of Fibonacci retracements. these sales. Not the overbought RSI reading with which this stock entered this earnings season after reacting positively to this “golden cross at the end of December 2020. Let’s zoom in a bit.
Now let’s flip the script a bit. With today’s loss, WFC has at least approached the top of that gap created about two weeks ago. This gap, in my opinion, could still be filled. This brings us close to a $ 38.25 retracement of this rally. See where I’m going with this. My bet is that some of these “smart” or “smart” algorithms do. I’m not selling my Wells Fargo today (with the 7% drop today I’m down about 3% on the position) I am considering adding, but I have to be patient. I think depending on the past behavior of the stock, I can pay anywhere from $ 30 to $ 31 for the WFC if I hold on. I don’t need to pay $ 32 and change now. In case you were wondering, a WFC put of $ 31 expiring in seven days always pays around $ 1.30. It sounds like a deal to me.
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