What a difference a year makes. Holding company Club Wells Fargo will release its quarterly results on Friday, followed by our other financial holding company, Morgan Stanley, on Tuesday. The sector’s first quarter results will come in a more pleasant context than last year, when the collapse of Silicon Valley Bank in March 2023 caused a shock wave throughout the sector. Big banks are also beyond last quarter’s messy numbers as they financed the FDIC’s regional bank bailout efforts. At the same time, the Federal Reserve’s stance on interest rate hikes has also changed from a year ago when central bankers were raising rates to current discussions about how many rate cuts to expect in 2024 The impact of higher and longer interest rates is in focus. again this earnings season. Some analysts believe this is a key financial metric for Wells Fargo. We are also optimistic, but want to temper our expectations because several factors influence the company’s performance. Expectations for Fed rate cuts have continued to decline since the start of 2024, when the market ambitiously priced six cuts. With some recent data signaling an uptick in inflation, including Wednesday’s Consumer Price Index for March, the market’s odds are now around two for this year, with the first forecast for September. Jim Cramer has repeatedly said that the economy’s resilience could reignite inflation and that the Fed is unlikely to cut rates anytime soon, if at all, this year. A higher rate environment could lead Wells Fargo to raise its full-year net interest income (NII) guidance, which we considered conservative when released alongside fourth-quarter results 2023. At the time, its NII outlook, which assumed five Fed rate cuts this year, weighed on the stock. WFC Wells Fargo’s (WFC) Year-To-Date Performance NII is revenue generated from loans, securities and other interest-earning assets less interest expenses paid on its liabilities such as customer deposits . Higher rates can be seen as a positive for Wells Fargo’s NII as the company relies heavily on its consumer banking and lending segment. It accounted for about 44% of overall revenue in 2023. In theory, higher borrowing costs mean Wells Fargo can generate more money from these interest-earning assets, but it’s not that simple. Rates are one of several factors that impact a company’s interest income, including potentially slow loan growth, which was a factor in the fourth quarter. It’s difficult to say, given the fluidity of inflation and rate expectations, whether Wells Fargo might change its NII outlook when it reports Friday. At a UBS financial services conference in February, Wells Fargo CFO Mike Santomassimo said the bank was “still very comfortable” with its NII guidance. “When you look at rates in isolation, higher rates (for a) slightly asset-sensitive company (like Wells) are positive,” Santomassimo said at the Feb. 26 event. However, he added that it’s just a “factor that you kind of have to take into account in the whole picture.” Wells Fargo’s spending forecasts will also be in focus after the bank barely met its estimates last quarter. Controlling expenses is crucial for Wells Fargo to continue improving its efficiency ratio, a measure of profitability in the banking industry. In the fourth quarter, management reported that the company achieved its multi-year goal of reducing expenses by $10 billion. We do not anticipate any thesis-changing events in Friday’s release and remain long-term bullish on bank stocks. At Wednesday’s morning meeting, Jim said, “I love Wells. Let Wells sell for $3 (per share), then you buy it. The stock was above $56 apiece when Jim made his statement, and it traded slightly lower on Thursday. Wells Fargo also has a key long-term growth outlook in potentially removing the Fed’s $1.9 trillion asset cap. It’s a big part of our investment thesis and why we’ve continued to hold the stock, even though we cut some earlier this year when its outperformance caused it to become our most important position. Once the bank’s growth cap is lifted, which we expect next year, Wells Fargo will once again be able to grow its balance sheet. Wells Fargo has also been making noise about getting more into the investment banking business. In February, Wells Fargo cleared a major regulatory hurdle related to past misdeeds, giving us more optimism about CEO Charlie Scharf and other management progress in lifting the growth cap. “Charlie has a really good handle on things,” Jim said earlier this week. “He’s also an excellent risk manager.” Wells Fargo shares have gained more than 15% since the start of the year — thanks in part to February’s regulatory victory — but in recent weeks, the financial reputation has cooled. Over the past month, the stock has fallen slightly while the S&P 500 has risen more than 1 percent. Morgan Stanley has generally been hurt by rising interest rates over the past two years as they have injected uncertainty into the economic landscape, limiting the trading activities in which its investment banking division can participate. The investment bank came back “strong” in the first quarter of 2024, JPMorgan analysts said in a note to clients this month. Industry-wide fees increased 21% quarter-over-quarter and 10% year-over-year, the company said, reaching their highest levels since the first quarter of 2022 – coinciding with the start of the Fed’s rate hike campaign. Although these JPMorgan analysts do not directly cover Morgan Stanley, the improving trading environment is encouraging for our financial holding company’s once-lucrative investment banking business. After booming at the start of the Covid pandemic, the segment has been lagging for over a year due to subdued mergers and acquisitions (M&A) activity and an IPO market. (IPO) weaker. In a note to clients last week, Jefferies analysts also said investment banking activity had “started to rebound”, adding that an increase in M&A announcements “bodes well” for Morgan Stanley’s advisory revenues in the second half of 2024. Morgan Stanley served as financial advisor to Discover in Capital One’s $35 billion acquisition of the credit card issuer, the one of the largest transactions announced in the first quarter of the year. Morgan Stanley’s (MS) Year-To-Date Performance Up Year-To-Date The Club agrees with Wall Street firms, given the many signs we’ve seen that indicate the trading environment improves. In addition to the increase in acquisitions, many big-name IPOs have already taken place in 2024. Morgan Stanley’s investment banking services have been tapped for big public debuts, like the tennis racket maker Wilson Amer Sports and chip company Astera Labs, both in the top five IPOs so far this year based on funds raised, according to Jefferies. Perhaps most notably, Morgan Stanley was a lead underwriter of Reddit’s multibillion-dollar IPO in March. The stock debuted at around $34 per share and is trading around $45 per share on Thursday. Reddit’s successful debut on the New York Stock Exchange can be seen as positive for both current investor appetite and the future trading environment. And we hope that private companies looking to go public will choose Morgan Stanley as a facilitator for their future offerings. Morgan Stanley earns a fee based on the size of the IPO and for selling the shares to investors. Elsewhere, margins at Morgan Stanley’s wealth management division will be under scrutiny after leaving much to be desired in the fourth quarter. One factor that weighed on the profitability of the segment, which houses online brokerage E-Trade, was that customers were moving their deposits to higher-yielding accounts in a process sometimes called “cash sorting.” However, deposit trends overall appear to have stabilized, according to Jefferies analysts. And a more favorable market should improve Morgan Stanley’s margins, analysts suggest. We would like to see the company get back on track to achieve its previously announced target of 30% operating margin for the segment in the long term. Under the leadership of recently deceased CEO James Gorman, Morgan Stanley embarked on an aggressive move into asset and wealth management, aiming to become less dependent on the cyclical nature of its investment banking operations. traditional. The company bought E-Trade in 2020 as part of that transformation, but the brokerage has become “sleepy”, Jim told the Club’s latest monthly meeting, alongside a call for management to improve the overall performance of the bank. “New CEO Ted Pick is scheduled to speak on the next conference call about how he’s going to grow revenue at a faster, less complacent pace,” Jim said. “It may boast a better IPO market, but this company has been a big disappointment compared to others in the industry.” Shares of Morgan Stanley fell 5% on Thursday after The Wall Street Journal reported that several federal regulators were questioning the bank over its wealth management practices. True, the report cites people familiar with the matter and has not yet been confirmed. However, with the information currently available to the Club, we believe that the decline in shares was a market overreaction. Still, Thursday’s losses add to a lackluster overall performance for the stock in 2024. Morgan Stanley shares have lost nearly 7% year to date, compared with a gain of about 8% for the financial sector of the S&P 500. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim performs a transaction. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
A woman walks past the Wells Fargo bank in New York, the United States, March 17, 2020.
Jeenah Moon | Reuters
What a difference a year makes.
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