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Wells Fargo (WFC) Up 0.2% Since Last Earnings Report: Can It Continue?
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It has been about a month since the last earnings report for Wells Fargo (WFC - Free Report) . Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Wells Fargo due for a pullback? 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.
Backed by lower expenses, Wells Fargo delivered a positive earnings surprise of 3.4% in fourth-quarter 2018. Earnings of $1.21 per share surpassed the Zacks Consensus Estimate of $1.17. Also, the bottom-line compared favorably with $1.16 recorded in the prior-year quarter.
Net income for the quarter came in at $6.1 billion compared with $6.2 billion reported a year ago.
Decline in expenses and higher net interest income aided results. Moreover, improving credit quality was a tailwind. However, decline in fee income was an undermining factor. Further, reduction in loans and deposits acted as headwinds in the quarter.
For the year ended 2018, earnings were $4.28, up 18 cents from the prior year. The bottom line also surpassed the Zacks Consensus Estimate of $4.25.
The quarter’s total revenues came in at $21 billion, lagging the Zacks Consensus Estimate of $21.6 billion. Also, the top line compared unfavorably with the prior-year quarter figure of $22.1 billion.
Revenues for the year were $86.4 billion, down 2.3% year over year. However, revenues surpassed the Zacks Consensus Estimate of $86.3 billion.
On a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues decreased 2.2%, Wholesale Banking revenues were down 6.9% and revenues in the Wealth and Investment Management unit fell nearly 9%.
Loans & Non-Interest Income Fall, Costs Decline, NII Improves
Wells Fargo’s net interest income (NII) in the fourth quarter came in at $12.6 billion, up 3% 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 expenses and lower mortgage loans held for sale. Further, net interest margin expanded 10 basis points year over year to 2.94%.
Non-interest income at Wells Fargo came in at $8.3 billion, down 14%, primarily due to fall in almost all components of income, including mortgage banking and insurance income. This was partly offset by higher other income.
As of Dec 31, 2018, total loans were $953.1 billion, down slightly year over year. This was due to reduction in consumer loans, partly offset by higher commercial loans. Total deposits came in at $1.3 trillion, down 4% from the prior-year quarter.
Non-interest expenses at Wells Fargo were around $13.3 billion, down 21% from the year-earlier quarter. This decline in costs primarily stemmed from fall in commission and incentive compensation, along with lower other expenses.
The company’s efficiency ratio of 63.6% came in below 76.2% recorded in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.
Credit Quality Improves
Wells Fargo’s credit quality metrics improved in the fourth quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.7 billion as of Dec 31, 2018, down 10.5% year over year.
Provision for credit losses was $521 million, falling 20%. Net charge-offs were $721 million or 0.30% of average loans in the fourth quarter, down 5.2% from the year-ago quarter’s net charge-offs of $751 million (0.31%). Non-performing assets were down 16.2% to $6.9 billion in the from $8.3 billion reported a year ago.
Capital Position
Wells Fargo maintained a solid capital position. In the October-December quarter, the company repurchased 142.7 million shares of its common stock, which net of issuances, reduced period-end common shares outstanding by $130.3 million.
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $146.4 billion from $154 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.7% under Basel III (fully phased-in) as of Dec 31, 2018, compared with 12% recorded in the year-earlier quarter.
Book value per share advanced to $38.06 from $37.44 recorded in the comparable period last year.
Outlook
First-quarter 2019
Mortgage originations for the quarter are expected to be down due to seasonality in the purchase market. Production margin is expected to be within the range of last two quarters of 2018.
Full-Year 2019
The company expects effective income tax rate to be about 18%, excluding the impact of any unanticipated discrete items.
Near-term
Management estimates the additional $2-billion targeted annual expense reductions by the end of 2019 to trickle down to the bottom line and be fully recognized in 2020.
Also, expenses are projected to be in the $52-$53 billion range for 2019 and $50-$51 billion range for 2020.
Moreover, ROE is anticipated to be 12-15% over the next two years (ended 2020), while ROTCE is expected to be 14-17%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, Wells Fargo has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. 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. Notably, Wells Fargo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Wells Fargo (WFC) Up 0.2% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Wells Fargo (WFC - Free Report) . Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Wells Fargo due for a pullback? 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 Q4 Earnings Beat Estimates, Costs Decline
Backed by lower expenses, Wells Fargo delivered a positive earnings surprise of 3.4% in fourth-quarter 2018. Earnings of $1.21 per share surpassed the Zacks Consensus Estimate of $1.17. Also, the bottom-line compared favorably with $1.16 recorded in the prior-year quarter.
Net income for the quarter came in at $6.1 billion compared with $6.2 billion reported a year ago.
Decline in expenses and higher net interest income aided results. Moreover, improving credit quality was a tailwind. However, decline in fee income was an undermining factor. Further, reduction in loans and deposits acted as headwinds in the quarter.
For the year ended 2018, earnings were $4.28, up 18 cents from the prior year. The bottom line also surpassed the Zacks Consensus Estimate of $4.25.
The quarter’s total revenues came in at $21 billion, lagging the Zacks Consensus Estimate of $21.6 billion. Also, the top line compared unfavorably with the prior-year quarter figure of $22.1 billion.
Revenues for the year were $86.4 billion, down 2.3% year over year. However, revenues surpassed the Zacks Consensus Estimate of $86.3 billion.
On a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues decreased 2.2%, Wholesale Banking revenues were down 6.9% and revenues in the Wealth and Investment Management unit fell nearly 9%.
Loans & Non-Interest Income Fall, Costs Decline, NII Improves
Wells Fargo’s net interest income (NII) in the fourth quarter came in at $12.6 billion, up 3% 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 expenses and lower mortgage loans held for sale. Further, net interest margin expanded 10 basis points year over year to 2.94%.
Non-interest income at Wells Fargo came in at $8.3 billion, down 14%, primarily due to fall in almost all components of income, including mortgage banking and insurance income. This was partly offset by higher other income.
As of Dec 31, 2018, total loans were $953.1 billion, down slightly year over year. This was due to reduction in consumer loans, partly offset by higher commercial loans. Total deposits came in at $1.3 trillion, down 4% from the prior-year quarter.
Non-interest expenses at Wells Fargo were around $13.3 billion, down 21% from the year-earlier quarter. This decline in costs primarily stemmed from fall in commission and incentive compensation, along with lower other expenses.
The company’s efficiency ratio of 63.6% came in below 76.2% recorded in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.
Credit Quality Improves
Wells Fargo’s credit quality metrics improved in the fourth quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.7 billion as of Dec 31, 2018, down 10.5% year over year.
Provision for credit losses was $521 million, falling 20%. Net charge-offs were $721 million or 0.30% of average loans in the fourth quarter, down 5.2% from the year-ago quarter’s net charge-offs of $751 million (0.31%). Non-performing assets were down 16.2% to $6.9 billion in the from $8.3 billion reported a year ago.
Capital Position
Wells Fargo maintained a solid capital position. In the October-December quarter, the company repurchased 142.7 million shares of its common stock, which net of issuances, reduced period-end common shares outstanding by $130.3 million.
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $146.4 billion from $154 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.7% under Basel III (fully phased-in) as of Dec 31, 2018, compared with 12% recorded in the year-earlier quarter.
Book value per share advanced to $38.06 from $37.44 recorded in the comparable period last year.
Outlook
First-quarter 2019
Mortgage originations for the quarter are expected to be down due to seasonality in the purchase market. Production margin is expected to be within the range of last two quarters of 2018.
Full-Year 2019
The company expects effective income tax rate to be about 18%, excluding the impact of any unanticipated discrete items.
Near-term
Management estimates the additional $2-billion targeted annual expense reductions by the end of 2019 to trickle down to the bottom line and be fully recognized in 2020.
Also, expenses are projected to be in the $52-$53 billion range for 2019 and $50-$51 billion range for 2020.
Moreover, ROE is anticipated to be 12-15% over the next two years (ended 2020), while ROTCE is expected to be 14-17%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
At this time, Wells Fargo has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. 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. Notably, Wells Fargo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.