A month has gone by since the last earnings report for Wells Fargo (
WFC Quick Quote WFC - Free Report) . Shares have added about 9.9% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Wells Fargo Q1 Earnings Beat on Fee Income Growth
Solid mortgage and capital markets performance supported Wells Fargo’s first-quarter 2021 earnings of $1.05 per share, which surpassed the Zacks Consensus Estimate of 69 cents. Also, the bottom line compared favorably with the prior-year quarter figure of 1 cent.
Results included the impact of $1.6 billion decline in allowance for credit losses, backed by an improving economic environment and lower net charge-offs. Also, it includes $208 million gain on the sale of student loans and $104 million write-down on related goodwill. Strong mortgage banking performance, improved trading and higher investment banking fees, and rise in asset-based fees in the wealth and investment management unit supported the bank. Further, a net benefit to provision of credit losses was reported during the quarter. However, reduced net interest income on lower rates and higher costs negatively impacted the results. In the first quarter, net income applicable to common stock came in at $4.4 billion compared with the $42 million recorded in the prior-year quarter. The quarter’s total revenues were $18.1 billion, outpacing the Zacks Consensus Estimate of $17.6 billion. Further, the top line was above the year-ago quarter’s $17.7 billion. Furthermore, quarterly revenue generation at the business segments declined on a year-over-year basis. The Consumer Banking and Lending segment’s total quarterly revenues jumped slightly, while Commercial Banking revenues were down 12%. Revenues in the Corporate and Investment Banking as well as the Wealth and Investment Management units rose 7% and 8%, respectively. Fee Income Leads to Higher Revenues, Costs Rise Wells Fargo’s net interest income in the first quarter came in at $8.8 billion, down 22% year over year due to lower interest rates, loan balances and higher mortgage-backed securities premium amortization. Furthermore, net interest margin shrunk 53 basis points (bps) to 2.05%.
Non-interest income at Wells Fargo came in at $9.3 billion, up 45% year over year. Higher cards fees, mortgage banking, net gains from equity securities and trading activities, investment advisory and other asset-based fees were partially offset by lower deposit-related fees and other income.
As of Mar 31, 2021, total loans were $861.6 billion, down 3% sequentially. Lower commercial and consumer loans led to the fall. Total deposits came in at $1.4 trillion, up 1% from the prior quarter.
Non-interest expense at Wells Fargo was $14 billion during the first quarter, up 7% year over year. Higher technology, telecommunications and equipment expenses, personnel and occupancy costs were partly muted by lower operating losses along with advertising and promotion expenses.
The company’s efficiency ratio of 77% was above the 74% 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 March-ended quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $18 billion as of Mar 31, 2021, up 50% year over year. Non-performing assets increased 28% to $8.2 billion in the first quarter from $6.4 billion reported in the year-earlier period.
Net charge-offs were $523 million or 0.24% of average loans in the reported quarter, down 44% from $941 million (0.38%). Provision for credit losses was a net benefit of $1 billion against the provision of $4 billion 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) increased to $139.6 billion from $134.7 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.8% under Basel III (fully phased-in) as of Mar 31, 2021, up from 10.7%.
Book value per share increased to $40.34 from $39.71 recorded in the comparable period last year.
Return on average assets was 0.99%, up from the prior-year quarter’s 0.13%. Return on average equity was 10.6%, up from the year-ago quarter’s 0.1%.
As of Mar 31, 2021, eligible external total loss absorbing capacity as a percentage of total risk-weighted assets was 25.2% compared with the minimum requirement of 23.3%.
Capital Deployment Activities Wells Fargo repurchased 17.2 million shares or $596 million in the first quarter. Outlook Second-Quarter 2021
Rise in Paycheck Protection Program loan forgiveness in the second quarter is expected to result in higher NII.
Mortgage originations are expected to decline in the second quarter, as the anticipated increase in the seasonal purchase market is expected to be more than offset by decline in refinancing activities. Wells Fargo expects origination volume to be robust on the back of strong demand in the retail channel, and its efforts to build up volume in the correspondent nonconforming market. Full-Year 2021
Net interest income is expected to remain flat or decline 4%, sequentially. Benefit of a steeper yield curve might be largely offset by softer-than-anticipated loan demand, low utilization rates on commercial loans and faster-than-expected prepayments on residential mortgages. 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. On expectations of economic recovery, the company expects to see increased loan demand from commercial customers in the second half of the year.
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 fresh estimates. The consensus estimate has shifted 11.18% due to these changes.
At this time, Wells Fargo has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile 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. It comes with little surprise Wells Fargo has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.