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Wells Fargo (WFC) Down 0.6% Since Last Earnings Report: Can It Rebound?
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It has been about a month since the last earnings report for Wells Fargo (WFC - Free Report) . Shares have lost about 0.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Wells Fargo due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Wells Fargo Q2 Loss Wider Than Expected, Provisions Up
Wells Fargo reported second-quarter 2020 loss per share of 66 cents, which was attributed to a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 16 cents.
Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and service charges on deposit accounts were major drags.
Provisions also soared on the coronavirus crisis during the reported quarter. Further, rise in non-interest expenses and a decline in loan balance acted as headwinds.
The company reported net loss of $2.4 billion in the second quarter against net income of $6.2 billion recorded in the prior-year quarter.
The quarter’s total revenues were $17.8 billion, lagging the Zacks Consensus Estimate of $18.3 billion. Also, revenues were lower than the year-ago quarter’s $21.6 billion.
Furthermore, on a year-over-year basis, the quarterly revenue generation at the company’s business segments was disappointing. The Community Banking segment’s total quarterly revenues slipped 25.7% and Wholesale Banking revenues were down 7.1%. Further, revenues in the Wealth and Investment Management unit fell 9.6%.
Lower Rates Hurt Revenues, Expenses Rise
Wells Fargo’s net interest income in the second quarter came in at $9.9 billion, declining 18% year over year. Lower interest income on account of lower rates mainly resulted in this downside, partly offset by decreased interest expenses. Furthermore, net interest margin shrunk 57 basis points (bps) year over year to 2.25%.
Non-interest income at Wells Fargo was $8 billion, plunging 16% year over year primarily due to a fall in card fees, other fees, insurance, service charges on deposit accounts, lease income, other income, net gains from equity securities, mortgage banking revenues, and trust and investment fees. The declines were partly muted by higher net gains from trading activities and debt securities.
As of Jun 30, 2020, total loans were $935.2 billion, declining 7.4% sequentially. The decline resulted from lower demand for commercial and consumer loans. Total deposits were $1.4 trillion, rising 2% from the prior quarter.
Non-interest expenses at Wells Fargo were $14.6 billion during the April-June quarter, rising 8% from the year-earlier period. The rise primarily resulted from higher personnel, occupancy along with FDIC and other deposit assessment-related expenses. These were partially offset by a decline in technology and equipment-related costs, and core deposit and other intangibles.
The company’s efficiency ratio of 81.6% was above 62.3% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.
Credit Quality Worsens
Wells Fargo’s credit quality metrics worsened during the June-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $20.4 billion as of Jun 30, 2020, up considerably year over year.
Net charge-offs were $1.1 billion or 0.46% of average loans in the reported quarter, rising 70.4% from the year-ago quarter’s net charge-offs of $653 million (0.28%). Non-performing assets climbed 23.8% to $7.8 billion in the second quarter from $6.3 billion reported in the year-earlier quarter. Notably, provision for credit losses was $9.6 billion compared with the prior-year quarter’s $503 million.
Capital Position
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $133 billion from $149.2 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.9% under Basel III (fully phased-in) as of Jun 30, 2020, down from the year-earlier quarter’s 12%.
Book value per share declined to $38.67 from $40.10 recorded in the comparable period of the last year.
Negative return on assets was 0.49% compared with the prior-year quarter’s positive return of 1.31%. Also, negative return on equity was 6.63% against the year-ago quarter’s positive return of 13.26%.
As of Jun 30, 2020, eligible external total loss-absorbing capacity as a percentage of total risk-weighted assets was 25.3% compared with the minimum requirement of 22%.
Capital Deployment Update
Wells Fargo expects to reduce its third-quarter common stock dividend to 10 cents per share from the previous payout of 51 cents. The decision is subject to approval by the board of directors by the end of this month.
The move comes after Federal Reserve puts a limit on dividend distributions for large banks amid the coronavirus scare.
Outlook
Net interest income is anticipated to be $41-$42 billion for 2020, suggesting a decline of 11-13% from the figure reported 2019.The decline is accounted to the lower interest rate environment and the asset cap placed on Wells Fargo’s ability to grow the size of balance sheet as well as higher MBS premium amortization, which is likely to persist through the remaining 2020.
Deposit costs are expected to continue to decline in the second half of 2020 and reach the single-digit lows realized in 2015 and 2016.
The company expects effective income tax rate for the remainder of the year to be 26%, excluding the impacts of any discrete items.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -13.25% due to these changes.
VGM Scores
Currently, Wells Fargo has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Wells Fargo has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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Wells Fargo (WFC) Down 0.6% Since Last Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for Wells Fargo (WFC - Free Report) . Shares have lost about 0.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Wells Fargo due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Wells Fargo Q2 Loss Wider Than Expected, Provisions Up
Wells Fargo reported second-quarter 2020 loss per share of 66 cents, which was attributed to a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 16 cents.
Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and service charges on deposit accounts were major drags.
Provisions also soared on the coronavirus crisis during the reported quarter. Further, rise in non-interest expenses and a decline in loan balance acted as headwinds.
The company reported net loss of $2.4 billion in the second quarter against net income of $6.2 billion recorded in the prior-year quarter.
The quarter’s total revenues were $17.8 billion, lagging the Zacks Consensus Estimate of $18.3 billion. Also, revenues were lower than the year-ago quarter’s $21.6 billion.
Furthermore, on a year-over-year basis, the quarterly revenue generation at the company’s business segments was disappointing. The Community Banking segment’s total quarterly revenues slipped 25.7% and Wholesale Banking revenues were down 7.1%. Further, revenues in the Wealth and Investment Management unit fell 9.6%.
Lower Rates Hurt Revenues, Expenses Rise
Wells Fargo’s net interest income in the second quarter came in at $9.9 billion, declining 18% year over year. Lower interest income on account of lower rates mainly resulted in this downside, partly offset by decreased interest expenses. Furthermore, net interest margin shrunk 57 basis points (bps) year over year to 2.25%.
Non-interest income at Wells Fargo was $8 billion, plunging 16% year over year primarily due to a fall in card fees, other fees, insurance, service charges on deposit accounts, lease income, other income, net gains from equity securities, mortgage banking revenues, and trust and investment fees. The declines were partly muted by higher net gains from trading activities and debt securities.
As of Jun 30, 2020, total loans were $935.2 billion, declining 7.4% sequentially. The decline resulted from lower demand for commercial and consumer loans. Total deposits were $1.4 trillion, rising 2% from the prior quarter.
Non-interest expenses at Wells Fargo were $14.6 billion during the April-June quarter, rising 8% from the year-earlier period. The rise primarily resulted from higher personnel, occupancy along with FDIC and other deposit assessment-related expenses. These were partially offset by a decline in technology and equipment-related costs, and core deposit and other intangibles.
The company’s efficiency ratio of 81.6% was above 62.3% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.
Credit Quality Worsens
Wells Fargo’s credit quality metrics worsened during the June-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $20.4 billion as of Jun 30, 2020, up considerably year over year.
Net charge-offs were $1.1 billion or 0.46% of average loans in the reported quarter, rising 70.4% from the year-ago quarter’s net charge-offs of $653 million (0.28%). Non-performing assets climbed 23.8% to $7.8 billion in the second quarter from $6.3 billion reported in the year-earlier quarter. Notably, provision for credit losses was $9.6 billion compared with the prior-year quarter’s $503 million.
Capital Position
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $133 billion from $149.2 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.9% under Basel III (fully phased-in) as of Jun 30, 2020, down from the year-earlier quarter’s 12%.
Book value per share declined to $38.67 from $40.10 recorded in the comparable period of the last year.
Negative return on assets was 0.49% compared with the prior-year quarter’s positive return of 1.31%. Also, negative return on equity was 6.63% against the year-ago quarter’s positive return of 13.26%.
As of Jun 30, 2020, eligible external total loss-absorbing capacity as a percentage of total risk-weighted assets was 25.3% compared with the minimum requirement of 22%.
Capital Deployment Update
Wells Fargo expects to reduce its third-quarter common stock dividend to 10 cents per share from the previous payout of 51 cents. The decision is subject to approval by the board of directors by the end of this month.
The move comes after Federal Reserve puts a limit on dividend distributions for large banks amid the coronavirus scare.
Outlook
Net interest income is anticipated to be $41-$42 billion for 2020, suggesting a decline of 11-13% from the figure reported 2019.The decline is accounted to the lower interest rate environment and the asset cap placed on Wells Fargo’s ability to grow the size of balance sheet as well as higher MBS premium amortization, which is likely to persist through the remaining 2020.
Deposit costs are expected to continue to decline in the second half of 2020 and reach the single-digit lows realized in 2015 and 2016.
The company expects effective income tax rate for the remainder of the year to be 26%, excluding the impacts of any discrete items.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -13.25% due to these changes.
VGM Scores
Currently, Wells Fargo has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Wells Fargo has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.