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Fee Income Growth to Aid Wells Fargo's (WFC) Q2 Earnings

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Wells Fargo (WFC - Free Report) is slated to announce second-quarter 2021 results, before the opening bell, on Jul 14. The company’s earnings are expected to have improved year over year, while revenues are projected to have declined.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on improved trading and higher investment banking fees, and a rise in asset-based fees in the wealth and investment management unit. However, reduced net interest income on lower rates and higher costs were undermining factors.

Over the trailing four quarters, Wells Fargo’s earnings have surpassed the consensus estimate on three occasions and missed in the other, the negative surprise being 58.2%, on average.

Wells Fargo & Company Price and EPS Surprise

 

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company price-eps-surprise | Wells Fargo & Company Quote

The company has been slimming down its business through divestitures. This is expected to have facilitated it to focus on core operations, boost efficiency and strengthen the balance sheet, while enabling investments in profitable avenues.

Factors to Influence Q2 Results

Falling Mortgage Banking Revenues: In the quarter under review, despite a decline in mortgage rates, mortgage origination activities decreased with the origination mix tilting from refinancing to purchases. The gradually improving economic conditions and a low-rate environment are expected to have encouraged prospective homebuyers to enter the housing market.

A moderation in refinancing activity is likely to offset these gains. Lower mortgage rates have likely led to faster prepayment. This is expected to have affected mortgage banking revenue growth.

The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $1.1 billion for the June-end quarter, which suggests a 14.7% decline from the prior quarter’s reported number.

Marginal Net Interest Income (NII) Growth: Despite the resumption of business activities, overall growth in loans was somewhat soft in the second quarter. Per the Fed’s latest data, commercial and industrial loans as well as real estate loans portfolios remained weak. Thus, the company’s interest income is anticipated to have witnessed less support from this avenue.

Persistent low interest rates are expected to have hurt Wells Fargo’s net interest margin and income, while Paycheck Protection Program round 1 forgiveness fees are likely to have supported NII.

Nonetheless, low deposit costs and yield curve steepening (the difference between short and long-term interest rates) are likely to have been offsetting factors. The Zacks Consensus Estimate of $8.9 billion for NII suggests marginal growth from the prior quarter’s reported figure.

The company earlier projected a rise in Paycheck Protection Program loan forgiveness for the quarter under review to result in higher NII.

Overall Non-Interest Revenue Growth: The second quarter witnessed continued strength in equity markets, boosting market-driven revenues. This is expected to have supported wealth, trust, trading and asset management revenues.

Moreover, with additional stimulus and continued economic reopenings; card fees are anticipated to have supported consumer spending in the quarter under review.

High Expenses: Wells Fargo’s costs are expected to have continued to flare up in the quarter under review, given its franchise investments in areas like mobile-banking technology, digital lending and brokerage offerings. Additionally, customer remediation expenses and ongoing litigation hassles are anticipated to have resulted in elevated legal costs in the quarter to be reported.         

Asset Quality:  The vaccine rollouts and additional market reopenings throughout the second quarter have infused optimism regarding the economic and GDP rebound. Hence, significant reserves (built due to the deterioration in the macroeconomic backdrop last year) are likely to have continued to be released in the second quarter similar to the previous quarter.

Here is what our quantitative model predicts:

Wells Fargo has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is +1.19%.

Zacks Rank: Wells Fargo currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate of 94 cents per share for earnings for the to-be-reported quarter has been revised marginally upward over the past seven days. It suggests significant year-over-year growth.

However, the consensus estimate of $17.8 billion for quarterly sales indicates a marginal decline from the prior-year quarter’s reported number.

Other Banks Worth a Look

Here are some other stocks you may want to consider, as according to our model these too have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for PNC Financial Services Group (PNC - Free Report) is +6.26% and it carries a Zacks Rank of 3 at present. The company is scheduled to report quarterly numbers on Jul 14. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Goldman Sachs (GS - Free Report) is slated to report quarterly earnings on Jul 13. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +5.82%.

U.S. Bancorp (USB - Free Report) is slated to report quarterly earnings on Jul 15. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.74%.

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