Wide-moat Wells Fargo (WFC) on the surface, reported a miss for third-quarter earnings. The bank reported EPS of $0.85, missing the FactSet consensus of $1.09 and our own estimate of $0.90. However, this was entirely driven by a bump in operating losses, which remain quite noisy as the bank works through its legal and regulatory issues. Adjusting operating losses were down to a run rate of $400 million from the $2.2 billion reported in the quarter, and the bank would have reported EPS closer to $1.21, ahead of both our own estimate and consensus.
Operating losses aside, it was generally a strong quarter for the bank. Adjusted expenses would have come in below our estimate while net interest income and fees both outperformed our forecasts. Management guided for expenses (excluding operating losses) of $12.3 billion for the fourth quarter, which puts the bank on track to meet their $51.5 billion target for the full year. While we plan to raise our operating loss forecast, core expense items remain in line with our expectations. The expense outlook will remain a key story for Wells Fargo as the bank works through a number of efficiency initiatives during its turnaround. We’ll get more details on the 2023 outlook next quarter, and we’re hoping for a roughly flat expense goal amidst an inflationary backdrop that is generally leading to increases for peers. Net interest income came in stronger than we expected, not unexpected given the Fed’s aggressive rate hikes, and NII is set to exceed our previous 2022 forecast by just over a billion. We plan to raise our revenue forecast accordingly.
As we adjust our short term NII forecast higher and largely keep our core expense forecast the same, we don’t expect to make a material change to our current fair value estimate of $58. Wells remains relatively cheap among our U.S. banking coverage, with an idiosyncratic turnaround story still playing out.
