All things considered, it could have been worse. While Wells Fargo (WFC 2.73%) is showing the expected signs of a wobbly economy -- and waning demand for mortgage loans in particular -- the bank managed to top last quarter's expectations.
Still, there are clear pockets of problems.
While it's not the sort of detail most investors would normally need to delve into, this time around merits an exception. So, here's a visualized comparison of Wells Fargo's recently ended fiscal third-quarter revenue to the past several quarters leading up to the three-month stretch ending in September. Note what isn't happening as much as what is happening.
Wells Fargo, then and now
Broadly speaking, it was a marked improvement. Revenue of $19.5 billion was up 3.5% year over year last quarter, and though earnings slipped from $1.17 per share to $0.85, that lower figure reflected charges of $0.45 per share. If you take those out of the calculation, profits were up 11%. Sure, the comparison is being made to a period that was still being crimped by the effect of the COVID-19 pandemic. Forward progress is forward progress, though, regardless of the circumstances.
Take a look at how and where Wells Fargo made that progress, though, and how and where it didn't.
Data source: Wells Fargo. Chart by author. All figures are in millions of dollars. Data may differ from company's reporting due to rounding or corporate-level accounting that doesn't reflect operating business lines.
These visual breakdowns often raise eyebrows, in that they readily put things in a new perspective.
For instance, although much talk has focused on the shrinking mortgage market (and Wells Fargo's home lending business is certainly not immune to this weakness, shrinking by more than 50% last quarter), mortgages were never a massive profit center for this particular bank. Even in late 2020, home-lending only accounted for about 14% of Wells' total top line.
The investment banking business is also unrevealing after an explosive 2021. This has never been a particularly big source of revenue for the big bank either, making its sharp slowdown a bit meaningless for Wells Fargo.
Notice where Wells Fargo has traditionally done very well, though, and where it's thriving now. That's consumer banking and small business loans, and wealth management, which typically account for about one-fourth and one-fifth (respectively) of the company's top line. Both of these businesses grew in a big way last quarter on a year-over-year basis, with banking and lending revenue up nearly 30% year over year. The bank's middle market business also improved to the tune of 42%. This unit makes up another 15% of Wells' typical sales.
Insight for bank investors
There are two key take-aways hidden in plain sight within the graphic above.
One of them is that the business lines that mean the very most to Wells Fargo are doing quite well. Conversely, the ones that are suffering don't mean nearly as much. Investors will want to keep this in mind as the rhetoric changes going forward. A rekindled investment banking market still won't mean much here, for instance, but the company is highly subject to consumers' changing moods. Another example: Equity and bond-trading activity isn't a big deal to Wells, as the bulk of its exposure to the stock market is its wealth management business that generates reliable recurring revenue even if the market is tanking.
While Wells Fargo would certainly like for all of its operations to be firing on all cylinders, the fact that all of the biggest ones are doing fine makes the stock more attractive here. It's an even more compelling purchase in light of the fact that despite last week's pop, shares are still down 26% from February's peak.
The other big take-away is that, although no two banks are exactly alike, Wells Fargo's growth in some areas and contraction in others offers a glimpse of how rival banks are doing (or at least should be doing) in those same slivers of the industry.
For instance, JPMorgan Chase's mortgage business slipped 34% year over year last quarter, while Citigroup's retail (consumer) banking and services businesses grew on a year-over-year basis as well. Citigroup's retail operations didn't grow nearly as much as Wells Fargo's did, though, while JPMorgan's commercial banking revenue outpaced Wells Fargo's with 21% year-over-year growth. Although they're all in the same proverbial boat, these little differences point to unique weaknesses and strengths for each banking outfit.
And that's a big deal, since one of your biggest jobs as an investor is simply knowing what to expect, and what not to. Deviations from those expectations can often point to a particular bank's strengths and weaknesses.
