It has been about a month since the last earnings report for Wells Fargo (
WFC Quick Quote WFC - Free Report) . Shares have lost about 3.5% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Wells Fargo Q4 Earnings Beat Estimates, Revenues Fall
Successful cost saving initiatives and unexpected release of reserves supported Wells Fargo’s 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.
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 in full-year 2020 were $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 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 billionin the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was 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 $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 the 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.
Net interest income is expected to remain flat or decline 4%, sequentially. About 1% of the potential decline is likely to be due to the divesture of student loan portfolio.
Also, it expects stable total loan balances on a sequential basis, with a modest reduction in the proportion of consumer loan balances.
Mortgage balances is likely to face headwinds in 2021, on account of elevated level of prepayments and given the expected sale or resecuritization of loans previously purchased out of agency mortgage securitizations.
Expenses are expected to amount to $53 billion (excluding restructuring charges and business exits). Revenue-related compensation might increase to $500 million, primarily in Wealth Management. The company expects to realize $3.7 billion of gross expense reductions in 2021. This might be partially offset by incremental spending, including personnel and technology along with investments in risk and regulatory work. After factoring in incremental spending, net reduction for 2021 is expected to be nearly $1.5 billion with reductions accelerating through the year.
The company expects to increase its return on tangible common equity to 10% in the short term if it is successful in reducing expenses and optimize capital levels closer to its internal target.
Effective income tax rate for 2021 is expected to be in the mid-single digits.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 6.36% due to these changes.
Currently, Wells Fargo has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Wells Fargo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.