Wells Fargo earnings top estimates on $1.05 billion release of loan loss reserves, stock jumps 5.6%

Wells Fargo beat expectations for its first-quarter earnings and revenue on Wednesday, and the bank’s management expressed optimism about lending growth later in the year, sending its stock higher.

Shares of the bank rose 5.6% following the earnings announcement. Here’s how the first-quarter results stacked up to Wall Street estimates.

Earnings: $1.05 in earnings per share versus 70 cents a share expected, according to Refinitiv.
Revenue: $18.06 billion versus $17.5 billion expected.

Wells Fargo results were helped by a net benefit of $1.05 billion from reserve releases. Banks bulked up their credit loss reserves last year as the pandemic pulled the U.S. economy into a sharp recession, but the financial firms have started to release those reserves as the recovery takes shape.

“Our results for the quarter, which included a $1.6 billion pre-tax reduction in the allowance for credit losses, reflected an improving U.S. economy, continued focus on our strategic priorities, and ongoing support for our customers and our communities,” CEO Charlie Scharf said in the earnings release. “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.”

The bank expects to see its commercial and middle market loan portfolio to grow later in the year as the economic recovery gains steam, chief financial officer Michael Santomassimo said on the earnings call.

“The demand across most commercial client segments has been pretty weak, and it seems to have stabilized over the last couple of months … we do really expect to see that commercial banking demand start to pick up as the economy picks up,” Santomassimo said.

Wells Fargo also reported a net interest margin of 2.05% and an efficiency ratio of 77% for the quarter. Analysts were expecting 2.10% and 78%, respectively, according to FactSet. Santomassimo said the bank’s net interest margin faced “temporary” pressure from hedging.

Scharf, who took over in late 2019, is running a company that is still recovering from the aftermath of its 2016 fake accounts scandal, including a cap on its asset growth from the Federal Reserve.

“We continue to prioritize the work necessary to build the appropriate risk and control infrastructure, and it remains our top priority,” Scharf said on the earnings call. “As a reminder, this is a multi-year journey, progress may not be a straight line, and while we still have significant work to do, we are diligently doing what’s necessary, issue by issue.”

Of the six biggest U.S. banks, Wells Fargo has the smallest Wall Street trading and investment banking operations, areas that have been on fire in recent months thanks to a red-hot IPO market and unprecedented Fed support.

Last year, Wells Fargo was the only bank among the six biggest U.S. lenders to be forced to cut its dividend after the annual Federal Reserve stress test. The firm also posted its first quarterly loss since the financial crisis and announced it was cutting billions of dollars in expenses.  

Entering Wednesday, Wells Fargo shares had climbed 33% this year, exceeding the 25% gain of the KBW Bank Index.