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Subdued NII, IB Fees to Hurt Wells Fargo's (WFC) Q1 Earnings
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Wells Fargo & Company (WFC - Free Report) is slated to announce first-quarter 2022 results, before the opening bell, on Apr 14. The company’s earnings and revenues are expected to have declined year over year.
In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on improved investment banking and other asset-based fees, as well as lower costs. However, reduced net interest income (NII), due to low yields from earning assets and lower loans, was the undermining factor.
Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on all four occasions, the surprise being 34.4%, on average.
Let’s now look at the other factors that are expected to have influenced Wells Fargo’s first-quarter earnings.
Loans and NII: In the first quarter, lending activity improved 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, there was considerable strength in both commercial and consumer lending, including credit cards, commercial and industrial loan, and residential and commercial real estate loans in January and February.
A decline in deposits during the quarter is expected to have reduced interest expenses. However, due to high levels of pay downs and payoffs, interest income from the paycheck protection program (PPP) loans is expected to decline.
While the Fed increased rates in mid-March, interest rates remained low for the majority of the first quarter. This, along with excess liquidity of the bank being invested in cash-like investments offering low yields, a competitive loan pricing landscape and fewer days during the quarter, might have hindered net interest margin and NII.
Amid the considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $9.14 billion, suggesting a 1.3% decline from the prior quarter’s reported figure.
Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to normalize in the first quarter. Mortgage banking revenues have been facing tough comps from the prior year that was propelled by low mortgage rates.
However, in the first quarter, mortgage rates increased. As of first-quarter 2022 end, the average rate on the 30-year loan rose to 4.67%, in sharp contrast to last year’s record-low mortgage rates of around 3%.
Hence, mortgage origination activities are estimated to have decreased dramatically, with rising rates discouraging refinancing activity.This, along with lower gains on sale margins, is expected to have affected the company’s mortgage servicing income.
Nonetheless, recent efforts to shift production to more retail loans and having superior production margins relative to correspondent loans might have provided a cushion.
The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $871 million for the first quarter, suggesting a 15.9% decline from the prior quarter’s reported number.
Overall Non-Interest Revenues: Wells Fargo’s investment advisory and other asset-based fees revenues are likely to have borne the brunt of weaker equity market performance in the quarter.
While reduced fee waivers and reversals are likely to have aided deposit-related fees, lower consumer transaction volumes due to fading government stimulus aid and less consumer savings might have hurt. Reductions in overdraft-related fees announced in January are also expected to have hurt deposit-related fees. The Zacks Consensus Estimate for the same stands at $1.4 billion, indicating a sequential decline of 3.4%.
Also, deal-making activities considerably cooled down in first-quarter 2022 due to volatile stock prices and surging inflation. A fall in investment banking activity due to subdued capital markets and a decline in equity and debt issuance deal volume was seen. Overall, high market volatility, triggered by the Ukraine crisis, and uncertainty regarding an economic slowdown tied to inflation created headwinds in the March-ended quarter. Such macro headwinds are projected to have reduced investment banking fees. The consensus mark for the same is $645 million, implying a sequential decline of 3.6%.
Client trading activity for equity and credit products is expected to have improved due to high market volatility thanks to the Russia-Ukraine conflict. This might aid net gains from trading activities. The consensus mark for the same is pegged at $150 million. It had reported a net loss from trading activities of $177 million in the prior quarter.
The Zacks Consensus Estimate for Wells Fargo’s total fee income is pegged at $8.66 billion for the first quarter, suggesting a 25.3% fall from the prior quarter’s reported number.
Expenses: Wells Fargo’s costs are expected to have continued to flare up in the first quarter, 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. This is expected to have hindered bottom-line growth in the first quarter.
Asset Quality: Card delinquency rates and commercial bankruptcies are anticipated to have been low in first-quarter 2022. Given the backdrop of continued improvement in credit trends, Wells Fargo is expected to have witnessed additional reserve releases in the first quarter.
However, high inflation and interest rates are anticipated to have affected borrowers’ ability to meet repayments. Moreover, improving loan growth and uncertainty around the macro outlook could affect provision releases in the first quarter.
The company’s fourth-quarter results were supercharged with the impact of an $875-million decline in allowance for credit losses, backed by an improving economic environment and lower net charge-offs.
What Our Model Predicts
Our proven model does not predict an earnings beat for WFC this time around. This is because 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 -6.12%.
Zacks Rank: Wells Fargo currently carries a Zacks Rank of 3.
The Zacks Consensus Estimate for first-quarter earnings has been revised marginally downward to 83 cents over the past week. Also, it suggests a year-over-year decline of 21%.
Also, the consensus estimate of $17.79 billion for quarterly revenues indicates a 1.5% fall from the prior-year quarter’s reported number.
Stocks That Warrant a Look
Associated Bancorp (ASB - Free Report) , M&T Bank (MTB - Free Report) and State Street (STT - Free Report) are a few banking stocks that you might want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.
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Subdued NII, IB Fees to Hurt Wells Fargo's (WFC) Q1 Earnings
Wells Fargo & Company (WFC - Free Report) is slated to announce first-quarter 2022 results, before the opening bell, on Apr 14. The company’s earnings and revenues are expected to have declined year over year.
In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on improved investment banking and other asset-based fees, as well as lower costs. However, reduced net interest income (NII), due to low yields from earning assets and lower loans, was the undermining factor.
Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on all four occasions, the surprise being 34.4%, on average.
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 first-quarter earnings.
Loans and NII: In the first quarter, lending activity improved 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, there was considerable strength in both commercial and consumer lending, including credit cards, commercial and industrial loan, and residential and commercial real estate loans in January and February.
A decline in deposits during the quarter is expected to have reduced interest expenses. However, due to high levels of pay downs and payoffs, interest income from the paycheck protection program (PPP) loans is expected to decline.
While the Fed increased rates in mid-March, interest rates remained low for the majority of the first quarter. This, along with excess liquidity of the bank being invested in cash-like investments offering low yields, a competitive loan pricing landscape and fewer days during the quarter, might have hindered net interest margin and NII.
Amid the considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $9.14 billion, suggesting a 1.3% decline from the prior quarter’s reported figure.
Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to normalize in the first quarter. Mortgage banking revenues have been facing tough comps from the prior year that was propelled by low mortgage rates.
However, in the first quarter, mortgage rates increased. As of first-quarter 2022 end, the average rate on the 30-year loan rose to 4.67%, in sharp contrast to last year’s record-low mortgage rates of around 3%.
Hence, mortgage origination activities are estimated to have decreased dramatically, with rising rates discouraging refinancing activity.This, along with lower gains on sale margins, is expected to have affected the company’s mortgage servicing income.
Nonetheless, recent efforts to shift production to more retail loans and having superior production margins relative to correspondent loans might have provided a cushion.
The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $871 million for the first quarter, suggesting a 15.9% decline from the prior quarter’s reported number.
Overall Non-Interest Revenues: Wells Fargo’s investment advisory and other asset-based fees revenues are likely to have borne the brunt of weaker equity market performance in the quarter.
While reduced fee waivers and reversals are likely to have aided deposit-related fees, lower consumer transaction volumes due to fading government stimulus aid and less consumer savings might have hurt. Reductions in overdraft-related fees announced in January are also expected to have hurt deposit-related fees. The Zacks Consensus Estimate for the same stands at $1.4 billion, indicating a sequential decline of 3.4%.
Also, deal-making activities considerably cooled down in first-quarter 2022 due to volatile stock prices and surging inflation. A fall in investment banking activity due to subdued capital markets and a decline in equity and debt issuance deal volume was seen. Overall, high market volatility, triggered by the Ukraine crisis, and uncertainty regarding an economic slowdown tied to inflation created headwinds in the March-ended quarter. Such macro headwinds are projected to have reduced investment banking fees. The consensus mark for the same is $645 million, implying a sequential decline of 3.6%.
Client trading activity for equity and credit products is expected to have improved due to high market volatility thanks to the Russia-Ukraine conflict. This might aid net gains from trading activities. The consensus mark for the same is pegged at $150 million. It had reported a net loss from trading activities of $177 million in the prior quarter.
The Zacks Consensus Estimate for Wells Fargo’s total fee income is pegged at $8.66 billion for the first quarter, suggesting a 25.3% fall from the prior quarter’s reported number.
Expenses: Wells Fargo’s costs are expected to have continued to flare up in the first quarter, 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. This is expected to have hindered bottom-line growth in the first quarter.
Asset Quality: Card delinquency rates and commercial bankruptcies are anticipated to have been low in first-quarter 2022. Given the backdrop of continued improvement in credit trends, Wells Fargo is expected to have witnessed additional reserve releases in the first quarter.
However, high inflation and interest rates are anticipated to have affected borrowers’ ability to meet repayments. Moreover, improving loan growth and uncertainty around the macro outlook could affect provision releases in the first quarter.
The company’s fourth-quarter results were supercharged with the impact of an $875-million decline in allowance for credit losses, backed by an improving economic environment and lower net charge-offs.
What Our Model Predicts
Our proven model does not predict an earnings beat for WFC this time around. This is because 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 -6.12%.
Zacks Rank: Wells Fargo currently carries a Zacks Rank of 3.
The Zacks Consensus Estimate for first-quarter earnings has been revised marginally downward to 83 cents over the past week. Also, it suggests a year-over-year decline of 21%.
Also, the consensus estimate of $17.79 billion for quarterly revenues indicates a 1.5% fall from the prior-year quarter’s reported number.
Stocks That Warrant a Look
Associated Bancorp (ASB - Free Report) , M&T Bank (MTB - Free Report) and State Street (STT - Free Report) are a few banking stocks that you might want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.
The Earnings ESP for ASB is +3.72% and the company carries a Zacks Rank #2 (Buy) at present. ASB is slated to report first-quarter 2022 results on Apr 21. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for ASB’s first-quarter earnings has moved 2.9% north over the past week.
MTB is scheduled to release first-quarter results on Apr 20. MTB currently has a Zacks Rank #3 and an Earnings ESP of +2.08%.
The Zacks Consensus Estimate for MTB’s first-quarter earnings has moved marginally downward over the past 30 days.
STT is scheduled to release earnings on Apr 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.97%.
The Zacks Consensus Estimate for STT’s first-quarter earnings has been revised 2.1% north over the past month.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.