Wells Fargo content with higher rates

Wells Fargo will reveal its fourth-quarter figures on 15 January and profits are rising despite record low interest rates.

Wells Fargo
Source: Bloomberg

The major bank will report its fourth-quarter figures on 15 January, and traders are expecting revenue of $21.85 billion and earnings per share of $1.02. That compares with the third-quarter revenue of $22.14 billion and EPS of $1.05.

The bank will also reveal its full-year results on the same date, and traders are anticipating revenue of $86.57 billion and EPS of $4.13. These estimates equate to a 1.5% rise in revenue and a 0.75% increase in EPS.

Wells Fargo was quick to pass on the interest rate hike to its mortgage customers after the Federal Reserve raised interest rates in December. Janet Yellen stated that four more 25 basis points interest rate hikes are in the pipeline for 2016, but the Fed funds futures market is pricing in two 25 basis points hikes. The prospect of more rate hikes will keep Wells Fargo in demand it will mean a higher net interest margin for the bank.

The company managed to produce higher revenues and profits in the latest quarter despite ultra-low interest rates, and now that rates have finally moved higher we can expect profits to keep growing.

Higher interest rates might be good for the bank’s lending margin, but investors will be keeping an eye on bad debt provisions as some borrowers could struggle to keep up with the payments. The bank is already cautious about lending to companies in the energy sector as charge-offs in its commercial and industrial loan book have increased by over 80% on the year.

Investment banks are very bullish on Wells Fargo, and out of the 38 ratings, 26 are buys, nine are holds, and three are sells. The average target price is $59, which is 15% above the current price.

Since the company posted its third-quarter figures, the number of short positions on the stock dropped by 2%.

  Forward 12M Price/Earnings Price/Book value Dividend Yield 5 Year Dividend Growth
Wells Fargo 12.04 1.53 2.92% 49.13%
JPMorgan Chase 10.02 0.99 2.98% 53.78%
Bank of America 10.86 0.68 1.31% 37.97%


Wells Fargo has a relatively high valuation compared with JPMorgan Chase and Bank of America going on the forward 12 months price/earnings and price/book value ratios. Wells Fargo is mid-table of the three when it comes to dividend yield and dividend growth over a five-year period.

Technical analysis from Joshua Mahony MSTA, Market Analyst at IG

Wells Fargo shares have been rallying heavily this week, following on from a rough start to the year, which saw the stock fall almost 10% in the first seven trading days of the year. The long-term trajectory of Wells Fargo shares is no doubt geared towards the upside, with a very steady uptrend in place throughout the post-2008 period.

This provides us with an underlying long-term bullish outlook within which shorter-term opinions are based. Looking at the hourly chart, it is clear that an uptrend is beginning to take hold once more despite recent losses, with a break through both $50.50 and now $51.63 resistance levels over the past two days.

With this in mind, the shorter-term emergence of an upward trending market, set within a long-term bull market provides us with a more confident upside view leading into the earnings release.

The key support level to watch out for in this share is $47.87, which marks the 2015 low. A break through this could provide us with a double-top pattern and a bearish view overall.

However, that remains some way from current price and with things seemingly on the turn for Wells Fargo, further upside is expected. This bullish view remains unless we see a closed hourly candle below $50.50.

Resistance levels of note are $53.26, $55.34 and $56.55. Support levels of note are $50.50, $48.94 and $47.87.

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