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Wells Fargo (WFC) Q1 Earnings Beat, Low Provisions Recorded

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Wells Fargo (WFC - Free Report) recorded positive earnings surprise of 4.7% in first-quarter 2018. Earnings of $1.12 per share surpassed the Zacks Consensus Estimate of $1.07. Moreover, results improved from the prior-year quarter earnings of $1.03.

Notably, results are preliminary which might be impacted on resolution of matters with Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) related to the bank’s compliance risk-management program with a charge of $1 billion in civil money penalties.

Lower provisions and higher interest income aided results. However, elevated interest expense and reduced non-interest income, with lower mortgage revenues, were the undermining factors. Moreover, expenses soared. Further, reduction in loans and deposits acted as headwinds for the quarter.

The quarter’s total revenues were $21.9 billion, outpacing the Zacks Consensus Estimate of $21.7 billion. However, the figure compared unfavorably with the prior-year quarter tally of $22.3 billion.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments was mixed. Community Banking segment’s total quarterly revenues increased slightly, while Wholesale Banking revenues were down around 3.9%, and revenues for the Wealth and Investment Management unit edged down moderately.

Loans, Non-Interest & Interest Income Fall, Costs Escalate

Wells Fargo’s net interest income in the quarter came in at $12.2 billion, down 1% year over year. Increased interest income from debt securities, loans held for sale, loans, equity securities, along with higher other interest income, were mostly offset by higher interest expense. Further, net interest margin contracted 3 basis points (bps) year over year to 2.84%.

Non-interest income at Wells Fargo came in at around $9.7 billion, down 2% year over year, primarily due to fall in almost all components of income, partly offset by net gains from equity securities and higher other income.

As of Mar 31, 2018, total loans were $947.3 billion, down around 1.2% year over year. Reduction in consumer as well as commercial loan portfolio was recorded. Total deposits were $1.3 trillion, down 2.3% from the prior-year quarter.

Non-interest expense at Wells Fargo was $14.2 billion, up 3% from the year-earlier quarter. The upsurge in expenses primarily stemmed from a rise in salaries and commission, and incentive compensation, along with elevated other expenses. Nonetheless, Wells Fargo remains committed to achieve expense reduction of $4 billion by the end of 2019.

The company’s efficiency ratio of 64.9% came in above the 62% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality Improved

Wells Fargo’s credit quality metrics improved in the reported quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $11.3 billion as of Mar 31, 2018, down 8.1% year over year.

Provision for credit losses was $191 million, plummeting 68.4% year over year. Net charge-offs were $741 million or 0.32% of average loans in the first quarter, down 8% from the year-ago quarter’s net charge-offs of $805 million (0.34%). Non-performing assets were down 22.4% to $8.3 billion in the quarter under review from $10.7 billion reported in the prior-year quarter.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. In the recently-reported quarter, the company returned $4 billion to shareholders through common stock dividends and net share repurchases.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $153.1 billion from $148.5 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 12% under Basel III (fully phased-in) as of Mar 31, 2018, compared with 11.2% recorded in the year-earlier quarter.

Book value per share advanced to $37.33 from $35.67 recorded in the comparable period last year.

Our Viewpoint

Top-line headwinds, aided by lower net interest income and fee income, were perceived. Furthermore, flaring up expenses remained a major drag, along with slowdown in mortgage business. Nevertheless, improved credit quality reflecting lower provisions were positives.

Despite several legal tensions, Wells Fargo remains focused on maintaining its financial position. Last year, the banking giant doubled its cost-cutting targets to combat escalating expenses. These efforts might help the company regain confidence of its clients and shareholders.

We believe, over the long term, investors will not be disappointed with their investment in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. We also anticipate strategic acquisitions and the bank’s efforts to address current adversities will help it expand its business and enhance profitability.
 

Wells Fargo & Company Price, Consensus and EPS Surprise

 

Wells Fargo & Company Price, Consensus and EPS Surprise | Wells Fargo & Company Quote

 

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Driven by top-line strength, Citigroup (C - Free Report) delivered a positive earnings surprise of 4.3% in first-quarter 2018. Earnings per share of $1.68 for the quarter easily outpaced the Zacks Consensus Estimate of $1.61. Also, earnings compared favorably with the year-ago figure of $1.35 per share.

Overall top-line strength was reflected, driven by higher banking, equity markets and consumer banking revenues, along with loan growth. However, expenses escalated on ongoing investments.

Among other major banks, Bank of America Corporation (BAC - Free Report) is scheduled to report first-quarter results on Apr 16, while U.S. Bancorp (USB - Free Report) will report on Apr 18.

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