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Wells Fargo (WFC) Q4 Earnings Beat, Stock Falls on Lower Revenues

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Successful cost saving initiatives and unexpected release of reserves supported Wells Fargo’s (WFC - Free Report) fourth-quarter 2020 earnings of 64 cents per share, which surpassed the Zacks Consensus Estimate of 59 cents. Also, the bottom line compared favorably with the prior-year quarter figure of 60 cents.

However, the stock depreciated about 5% in pre-market trading, reflecting investors’ disappointment with the results. Notably, the full-day trading session will display a clearer picture.

Increased gains on equity securities and higher mortgage banking revenues supported the bank. Moreover, the company reflects prudent expense management. Further, a net benefit to provision of credit losses was reported during the quarter. However, reduced net interest income on lower rates negatively impacted its results.

In 2020, earnings per share came in at 41 cents compared with $4.05 in 2019. The reported figure, however, surpassed the Zacks Consensus Estimate of 38 cents.

In the fourth quarter, net income came in at $3 billion compared with the $2.9 billion recorded in the prior-year quarter. In 2020, net income was $3.3 billion compared with the $19.5 billion reported in the prior year.

The quarter’s total revenues came in at $17.9 billion, lagging the Zacks Consensus Estimate of $18 billion. Further, the top line was lower than the year-ago quarter’s $19.9 billion.

Revenues for full-year 2020 came in at $72.3 billion, missing the Zacks Consensus Estimate of $72.5 billion. Also, revenues edged down 15%, year over year.

Furthermore, quarterly revenue generation at the business segments disappointed, on a year-over-year basis. The Consumer Banking and Lending segment’s total quarterly revenues slipped 5% and Commercial Banking revenues were down 43%. Further, revenues in the Corporate and Investment Banking as well as the Wealth and Investment Management units fell 7% and 4%, respectively.

Net Interest and Fee Income Fall, Costs Decline

Wells Fargo’s net interest income in the fourth quarter came in at $9.3 billion, down 17% year over year due to lower interest rates, loan balances, investment securities balances and higher mortgage-backed securities premium amortization. Furthermore, net interest margin shrunk 40 basis points (bps) to 2.13%.

Non-interest income at Wells Fargo came in at $8.7 billion, down slightly year over year. Lower cards fees, deposit-related fees and lease income was offset by higher revenues from net gains from equity securities and mortgage banking.

As of Dec 31, 2020, total loans were $887.6 billion, down 4% sequentially. Lower commercial and consumer loans led to the fall. Total deposits came in at $1.4 trillion, up 2% from the prior quarter.

Non-interest expense at Wells Fargo was $14.8 billion during the fourth quarter, down 5% year over year. Lower operating losses, technology, telecommunications and equipment expenses along with advertising and promotion expenses were partly muted by higher occupancy costs.

The company’s efficiency ratio of 83% came in above the 79% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality: A Mixed Bag?

Wells Fargo’s credit quality metrics were a mixed bag during the December quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $19.7 billion as of Dec 31, 2020, up 88.5% year over year. Non-performing assets increased 57.3% to $8.9 billion in the fourth quarter from the $5.6 billion reported in the year-earlier period.

Net charge-offs were $584 million or 0.26% of average loans in the reported quarter, down 24% from the year-ago quarter’s $769 million (0.32%). Provision for credit losses was a net benefit of $179 million, due to a $757 million reserve release on account of sale of its student loan portfolio. This compares with the provision of $644 million reported in the year-ago quarter.

Healthy Capital Position

Wells Fargo has maintained a sturdy capital position. Its Tier 1 common equity under Basel III (fully phased-in) decreased to $138.3 billion from $138.8 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.6% under Basel III (fully phased-in) as of Dec 31, 2020, up from 11.1%.

Book value per share declined to $39.76 from t$40.31 recorded in the comparable period last year.

Return on assets was 0.62%, up from the prior-year quarter’s 0.59%. Return on equity was 6.4%, up from the year-ago quarter’s 5.9%.

As of Dec 31, 2020, eligible external total loss absorbing capacity (TLAC) as a percentage of total risk-weighted assets was 25.8% compared with the minimum requirement of 23.3%.

Capital Deployment Activities

Following the approval from Federal Reserve to buy back shares last month, Wells Fargo’s board has approved an increase in the common stock repurchase program by an additional 500 million shares, bringing the total authorized amount to 667 million common shares.

Recent Transactions

Wells Fargo recently agreed to divest its Canadian Direct Equipment Finance business to the Toronto-Dominion Bank. The deal is expected to close in the first half of 2021, subject to necessary approvals. The unit has assets of about C$1.5 billion ($1.18 billion) and more than 120 employees.

This marks one of the Wells Fargo’s moves to offload unprofitable businesses and use the freed capital in more profitable opportunities.

David Marks, head of Wells Fargo Commercial Capital said, "This group of talented Canada-based employees and their equipment finance customers will benefit from TD's strong franchise and allow us to focus our efforts on our U.S. equipment finance capabilities while continuing to serve our asset-based lending and distribution finance customers in Canada.”

Our Viewpoint

Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. In addition, the company is working on strategic initiatives, which might help regain the confidence of its clients and shareholders.

Nevertheless, top-line headwinds, along with lower net interest and fee income woes, are expected to prevail amid the continued coronavirus crisis. Also, the bank’s performance reflects prudent expense management and solid mortgage banking revenues.

Wells Fargo & Company Price, Consensus and EPS Surprise

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.

Performance of Mega Banks

Unexpected large reserve releases, along with solid capital markets performance, drove JPMorgan’s (JPM - Free Report) fourth-quarter 2020 earnings of $3.79 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.72.

PNC Financial (PNC - Free Report) pulled off fourth-quarter 2020 positive earnings surprise of 23% on prudent expense management. Earnings per share of $3.26 surpassed the Zacks Consensus Estimate of $2.65. Also, the bottom line was 9.8% higher than the prior-year level.

First Republic Bank (FRC - Free Report) delivered an earnings surprise of 5.3% in fourth-quarter 2020 on solid top-line strength. Earnings per share of $1.60 surpassed the Zacks Consensus Estimate of $1.52. Additionally, the bottom line climbed 15.1% from the year-ago quarter.

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