Wells Fargo (WFC) reported better-than-expected fourth-quarter 2021 results before the opening bell on Friday last week. 

Total revenue of $20.86 billion (+13% YoY) exceeded the FactSet consensus estimate of $18.79 billion, adjusted earnings per share of $1.38 (+109% YoY) topped estimates of $1.11. 

Net interest income of $9.262 billion ( -1% YoY) exceeded estimates of $9.061 billion estimate. Meanwhile, noninterest income (fee-based revenues) was $11.594 billion (+27% YoY) and topped estimates of $9.931 billion.

Average loans were $875 billion  — better than estimates of $860.9 billion. Loan growth picked up to $895.4 billion. That represents an increase of 1% YoY; it's also higher than estimates of $866.5 billion. This is a very good sign and exactly what investors want to see, as rise of interest rates will make those loans more profitable for the banks. 

Bank's net interest margin (NIM) was reported at 2.11%, up 0.08% from the third quarter and better than estimates of being flat. NIM is essentially the spread between what banks pay on deposits and what they earn on loans. Wells Fargo is one of the most interest rate sensitive banks we follow, meaning a steeper yield curve and higher rates will lead to stronger levels of profitability in the future. 

On the expense front, noninterest expense was $13.198 billion, down from $13.303 billion in the third quarter, but slightly higher than estimates of $13.018 billion. The sequential decline in expenses reflects a 2% decrease in personnel expenses (lower salaries, employee benefits and incentive compensation expense) and a 2% increase in non-personnel expenses (things like restructuring charges and advertising and promotion expenses.)

As much as we like Wells Fargo for its interest rate sensitivity, another layer to this story is restructuring and chopping expenses over the next few years. That’s why Wells Fargo’s “efficiency” ratio — is a measure of operating expenses as a percentage of revenues — is so closely watched. In the fourth quarter, Wells Fargo's efficiency ratio fell significantly to 63% from 70.6% one quarter ago and was much better than estimates of 70%. Wells Fargo still has plenty of restructuring work ahead of them, but the fourth-quarter result was an excellent sign of progress.

The return on tangible common equity (ROTCE) came in at 15.3%, a big improvement from 8.0% one year ago and 13.2% in the third quarter, and the bank's tangible book value per share (TBVPS) grew to $36.35 from $35.54 in the third quarter and exceeded estimates of $36.17. 

On capital returns, the bank continued to repurchase stocks. Wells Fargo repurchased $7.0 billion worth of stock in the fourth quarter. Wells Fargo is working through a four-quarter $18 billion repurchase program that was announced at last year’s CCAR, but that number could go higher because the bank has plenty of capacity to increase its capital distributions.

2022 outlook:

Turning to management’s 2022 outlook, Wells Fargo believes net interest income could potentially increase roughly 8% compared to the full year 2021 level of $35.8 billion. One of the factors that make up this view includes a 5% increase from the assumption of 3x 0.25% rate hikes beginning in May. However, we know the first rate hike could come as soon as March, so there is some potential for upside here. 

On expenses, management sees expenses falling from $53.8 billion in 2021 (or $52.3 billion when excluding certain items) to roughly $51.5 billion in 2022. Management expects to deliver a net expense reduction of $1.6 billion, which includes $3.3 billion of identified efficiency initiatives partially offset by $1.2 billion of incremental investments and $0.5 billion in other items. Remember, progress on efficiency initiatives is a multiyear story, and management now believes potential gross savings will be “in excess of $10 billion” representing an improvement from their previously disclosed view of $8 billion.

Regarding the asset cap, management reiterated its view that they continue to make progress, but “speed bumps” are to be expected from time to time. Although the timing of the asset cap lift remains uncertain, we believe it will happen at some point due to the great work CEO Charlie Scharf and his completely new management team are accomplishing. We see the lifting of the asset cap as a major catalyst event for Wells as it should lead to more deposit growth, stronger ROTCE performance, and a stock re-rating.

Our view:

It’s great to see WFC trade higher to another new 52-week high on a day where the two other big banks that reported (JPMorgan Chase and Citigroup) are moving lower. We did some trimming in Wells going into the print because we viewed that expectations were so elevated, but the fact that the stock traded up ~3% after the print cannot highlight any better the strength of the business. With multiple interest rates hikes laying ahead (short-term catalyst), cost savings driving expenses lower, and a balance sheet with plenty of capacity for additional capital returns (long-term catalyst), we continue to view Wells Fargo as the number one big bank stock to own.