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Can Fee Income Growth Drive Wells Fargo's (WFC) Q4 Earnings?

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Wells Fargo & Company (WFC - Free Report) is slated to announce fourth-quarter and 2021 results, before the opening bell, on Jan 14. The company’s earnings and revenues are expected to have improved year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on improved investment advisory and other asset-based fees, aided by higher market valuations as well as lower costs. However, reduced net interest income (NII), owing to low yields on earning assets and lower loans, was the undermining factor.

Over the trailing four quarters, Wells Fargo’s earnings have surpassed the consensus estimate on all four occasions, the surprise being 29.9%, 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

Let’s now look at the other factors that are expected to have influenced Wells Fargo’s quarterly performance.

Loans and NII: In the fourth quarter, which is typically a seasonally-strong quarter for loan growth, lending activity witnessed decent acceleration sequentially. This is likely to have been a notable tailwind for Wells Fargo, which is primarily focused on the lending business. Per the Fed’s latest data, commercial and industrial loan, real estate loan, and consumer loan portfolios remained strong in October and November.

Also, stimulus-driven liquidity injected in the banking system remained high, with expanding deposit balances. This, too, is likely to have aided NII.

However, high levels of pay downs and payoffs, and stiff loan pricing competition have hindered loan volumes. This is anticipated to have affected its NII and net interest margin for the fourth quarter.

The bank’s net interest margin is expected to have continued to be affected by the low-rate backdrop, excess bank liquidity being invested in cash-like investments offering low yields and a competitive loan pricing landscape.

Amid the considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $9.03 billion, suggesting a 2.6% decline from the prior-year quarter’s reported figure.

For 2021, management expects NII to be near the bottom of its prior outlook of flat to down 4% from the fourth-quarter 2020 reported annualized level of $36.8 billion.

Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to normalize in the fourth quarter. Mortgage banking revenues have been facing tough comps from the origination boom in 2020 that was propelled by ultra-low mortgage rates.

However, in the quarter under review, mortgage rates increased sequentially. Mortgage origination activities are estimated to have decreased dramatically, with rising rates discouraging refinancing activity.

Management expects fourth-quarter 2021 originations to decline modestly, given the recent increase in mortgage rates and the seasonal trends in the purchase market.

The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $1.08 billion for the fourth quarter, suggesting a 10.5% decline from the prior-year quarter’s reported number.

Overall Non-Interest Revenues: Equity markets held strong in the fourth quarter, with a pickup in volatility and volumes, boosting market-driven revenues. This is expected to have supported wealth, trust, trading and asset management revenues.

Moreover, with continued economic re-openings and increasing consumer spending in the quarter under review, card fees are anticipated to have risen. Also, the company has made efforts to expand its credit-card offerings by launching a range of Visa cards, the Active Cash Card, in July and the Wells Fargo Reflect Card in October. The offerings are likely to have expanded card fees for Wells Fargo in the fourth quarter.

High volatility in the equity markets in December is expected to have spiked trading volumes in equities, providing decent support to trading revenues. This is likely to have been offset by low fixed-income trading activities.

Similar to the past several quarters, deal-making continued at a robust pace in fourth-quarter 2021. This, too, is expected to have aided fee income growth.

The Zacks Consensus Estimate for Wells Fargo’s total fee income is pegged at $9.62 billion for the fourth quarter, suggesting 11.3% growth from the prior-year quarter’s reported number.

Expenses: Wells Fargo’s costs are expected to have continued to flare up in the quarter under review, given its franchise investments in technology and digitalization efforts. Additionally, amid the rising inflation, salary expenses are anticipated to have led to elevated non-interest expenses in the quarter to be reported. This is expected to have hindered bottom-line growth in the fourth quarter.

The company projects fourth-quarter operating losses of $250 million.

It expects 2021 operating expenses (excluding restructuring charges and the cost of business exits) of $53.5 billion. This includes $1.25 billion in operating losses, $1 billion in revenue-related expenses, and expenses related to certain business sales.

Asset Quality:  Card delinquency rates and commercial bankruptcies were low in fourth-quarter 2021. Given the backdrop of continued improvement in credit trends, Wells Fargo is expected to have witnessed additional reserve releases in the fourth quarter.

The company’s third-quarter results were supercharged with the impact of a $1.7-billion decline in the allowance for credit losses, backed by an improving economic environment and lower net charge-offs. This is likely to have continued in the fourth quarter, supported by hefty government stimulus.

Here is what our quantitative model predicts:

Wells Fargo does not have 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 -4.43%.

Zacks Rank: Wells Fargo currently carries a Zacks Rank of 2 (Buy).

The Zacks Consensus Estimate for fourth-quarter earnings has been revised marginally downward to $1.09 over the past week. Nonetheless, it suggests a year-over-year surge of 70.3%.

Also, the consensus estimate of $18.5 billion for quarterly revenues indicates 2.9% growth from the prior-year quarter’s reported number.

Stocks That Warrant a Look

Fifth Third Bancorp (FITB - Free Report) , Citizens Financial Group, Inc. (CFG - Free Report) and Huntington Bancshares Incorporated (HBAN - Free Report) are a few stocks that you might want to consider as these have the right combination of elements to post earnings beat in their upcoming releases, per our model.

The Earnings ESP for Fifth Third is +0.27% and it carries a Zacks Rank #3 at present. FITB is slated to report the fourth-quarter 2021 results on Jan 20.

The Zacks Consensus Estimate for Fifth Third’s fourth-quarter earnings has been unchanged over the past 30 days.

Citizens Financial is scheduled to release the fourth-quarter results on Jan 19. CFG currently has a Zacks Rank #3 and an Earnings ESP of +0.12%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Citizens Financial’s fourth-quarter earnings has been unchanged over the past 30 days.

Huntington Bancshares is scheduled to release earnings on Jan 21. HBAN, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.20%.

The Zacks Consensus Estimate for Huntington Bancshares’ fourth-quarter earnings has been revised 2.1% downward over the past week.