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Why Is Wells Fargo (WFC) Down 2.7% Since Last Earnings Report?

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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 2.7% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

Wells Fargo Q2 Earnings Beat Estimates, NII Disappoints

Driven by prudent expense management, Wells Fargo delivered a positive earnings surprise of 12.1% in second-quarter 2019. Earnings of $1.30 per share surpassed the Zacks Consensus Estimate of $1.16. Results also came in higher than the prior-year quarter adjusted earnings of $1.08 per share.

Higher fee income and fall in expenses aided the company’s performance. Further, escalation in loans and deposits acted as tailwinds. However, reduced net interest income was an undermining factor. Moreover, provisions soared.

Net income came in at $6.2 billion compared with $5.2 billion recorded in the prior-year quarter.

The quarter’s total revenues came in at $21.6 billion, outpacing the Zacks Consensus Estimate of $20.8 billion. The top line, however, came in line with the prior-year quarter figure.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments was mixed. The Community Banking segment’s total quarterly revenues declined and Wholesale Banking revenues were down around 1.8%. Yet, revenues in the Wealth and Investment Management unit were up 2.5%.

Net Interest Income Falls, Costs Down, Fee Income Improves

Wells Fargo’s net interest income in the quarter came in at $12.1 billion, down 4% year over year. Higher interest expenses and lower interest income from loans held for sale led to this downside, partly offset by increased interest income from debt and equity securities, loans along with higher other interest income. Furthermore, net interest margin shrunk 11 basis points (bps) year over year to 2.82%.

Non-interest income at Wells Fargo came in at around $9.5 billion, up 5% year over year, primarily owing to rise in service charges on deposit accounts, card fees, net gains from trading activities and equity securities along with elevated other income. These increases were mainly muted by lower mortgage banking revenues and reduced net gains on debt securities.

As of Jun 30, 2019, total loans were $949.9 billion, slightly up sequentially. Higher consumer and commercial loan portfolio was recorded. Total deposits came in at $1.29 trillion, up 2.4% from the prior quarter.

Non-interest expenses at Wells Fargo were around $13.4 billion, down 4% from the year-earlier quarter. This decline in expenses primarily resulted from lower core deposit and other intangibles, FDIC and other deposit assessments, commission and incentive compensation along with other expenses. These were partly offset by rise in salaries and employee benefits along with equipment costs.

The company’s efficiency ratio of 62.3% was below 64.9% recorded in the year-ago quarter. A fall in efficiency ratio indicates a rise in profitability.

Credit Quality: A Mixed Bag

Wells Fargo’s credit quality metrics was a mixed bag in the June-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.6 billion as of Jun 30, 2019, down 4.5% year over year.

Net charge-offs were $653 million or 0.28% of average loans in the reported quarter, up 8.5% from the year-ago quarter’s net charge-offs of $602 million (0.26%). Non-performing assets slipped 17.1% to $6.3 billion in the second quarter from $7.6 billion reported a year ago. Notably, provision for credit losses was $503 million, 11% higher.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. During the April-June quarter, the company returned $6.1 billion to shareholders through common stock dividends and net share repurchases.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $149.2 billion from $153 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated to be 12% under Basel III (fully phased-in) as of Jun 30, 2019, in line with the year-earlier quarter.

Book value per share advanced to $40.10 from $37.41 recorded a year ago.
Return on assets was 1.31%, up from 1.10% in the prior-year quarter. Return on equity was 13.26%, up from 10.60%.

Outlook

Third-Quarter 2019

Mortgage originations for the quarter are expected to be up due to seasonality for home buying, along with some additional refinance activity, which resulted from the recent decrease in mortgage interest rates.

Production margin is expected to increase modestly in third-quarter 2019.

Full-Year 2019

The company expects effective income tax rate to be about 18%, excluding the impact of any unanticipated discrete items.

Management expects NII to be down 2-5% compared with 2018 due to a flatter curve, tightening loan spreads, resulting from a competitive market with ample liquidity and continued upward pressure on deposit pricing.

Near-term

Per management, the bank’s strategic and financial targets beyond 2019 will be established once a permanent CEO comes in place. Therefore, currently, the bank focuses on cost-saving initiatives.

Also, expenses are projected to be in the $52-$53 billion range for 2019, excluding annual operating losses in excess of $600 million such as litigation and remediation accruals and penalties. For 2020, expenses are expected in $50-$51 billion range.

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?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Wells Fargo has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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