Wells Fargo Q4 Earnings Preview: Key Catalysts and Expectations

Wells Fargo & Co. (NYSE: WFC) is set to release its Q4 2024 earnings report on Wednesday, January 15, before the market opens. Analysts expect the bank to post earnings per share (EPS) of $1.34, up 55.8% year-over-year, on revenue of $20.58 billion, reflecting a 0.5% year-over-year increase. For the full year, consensus estimates forecast EPS of $5.29 on revenue of $82.71 billion. Investors will closely monitor net interest income (NII), a crucial metric for banks, following a Q3 decline driven by higher funding costs and shifts in deposit mix and pricing.

Wells Fargo’s stock has been a strong performer, gaining over 49% in 2024, significantly outperforming the S&P Banks Select Industry Index. Despite this rally, the stock is still considered fairly valued with a price-to-book ratio of 1.46x, well within its peer range. Bulls are optimistic about key catalysts, including a potential removal of the Federal Reserve-imposed asset cap in 2025 and favorable regulatory conditions under the Trump administration, which could unlock significant growth opportunities for the bank.

Potential Asset Cap Removal: A Key Bullish Argument

One of the most significant overhangs on Wells Fargo since 2018 has been the asset cap imposed by the Federal Reserve in response to governance and risk management issues. This restriction has limited the bank’s ability to grow its balance sheet and generate higher interest income. However, reports suggest that Wells Fargo is nearing the final stages of remediation, with the asset cap potentially being lifted in early 2025. Such a move would allow the bank to expand lending and deposits, providing a substantial boost to profitability.

In addition, Wells Fargo is leveraging its collaboration with Volkswagen to secure its position as the preferred financing provider for Volkswagen and Audi vehicles in 2025. With Volkswagen selling over 350,000 vehicles in 2024, this partnership is expected to contribute significantly to the bank's auto loan portfolio and future revenue growth.

Key Drivers to Watch

Investors will be looking at several key drivers in the upcoming earnings report. Wells Fargo’s credit card business has been a strong growth area, with 13 consecutive quarters of portfolio expansion. Newly launched co-branded cards, such as those with Expedia, are expected to contribute further to this momentum. Consumer spending and sentiment in Q4 2024 were strong, supporting expectations for continued credit card growth.

The bank's strong balance sheet and capital position also stand out. Wells Fargo ended Q3 2024 with a Common Equity Tier 1 (CET1) ratio of 11.3%, up from 11.0% in Q2, and a liquidity coverage ratio of 127%, well above regulatory requirements. This financial strength enabled significant capital returns to shareholders, including $3.5 billion in stock repurchases in Q3 and $15.6 billion year-to-date.

Operational efficiency is another focus area. The bank has reduced headcount by 20% since Q3 2020 and has been leveraging technology to streamline operations. These measures have helped lower expenses and are expected to enhance profitability further.

Valuation and Risks

Despite its rally, Wells Fargo is seen as fairly valued relative to peers, with a price-to-earnings ratio of 13.6x for 2024. Analysts at Truist and Keefe Bruyette have expressed optimism about the bank's growth prospects, citing the potential for constructive 2025 guidance. Wells Fargo's ability to leverage its extensive customer base and distribution network into higher returns positions it well for franchise growth after years of stagnation.

However, risks remain. Commercial real estate, particularly office spaces, continues to face significant challenges due to high vacancy rates and financial stress among landlords. A deterioration in this segment could negatively impact Wells Fargo’s credit quality. Additionally, market volatility in interest rates and equities could pressure the bank's interest and investment income.

Conclusion

Wells Fargo’s Q4 earnings report is shaping up to be a key moment for the bank as it navigates a pivotal phase in its turnaround strategy under CEO Charlie Scharf. With strong fundamentals, improving operational efficiency, and potential regulatory tailwinds, the bank is well-positioned for growth in 2025 and beyond. The anticipated removal of the asset cap could serve as a significant catalyst, allowing Wells Fargo to unlock its full potential. Investors will be closely watching key metrics, including NII, credit quality, and guidance, to assess whether the bank can sustain its positive momentum.