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Wells Fargo (WFC) Q2 Earnings Lag on Provisions, Weak Mortgage
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Wells Fargo’s (WFC - Free Report) second-quarter 2022 earnings per share of 74 cents lagged the Zacks Consensus Estimate of 77 cents. Also, the bottom line declined 14% year over year. Results in the reported quarter included a $412 million or 8 cents per share of impairment of equity securities impact.
Shares of WFC have lost almost 1% in pre-market trading on disappointing quarterly performance. The ongoing Russia-Ukraine conflict and macroeconomic concerns, along with disappointing mortgage loan originations (down 36% year over year), seem to be weighing on investor sentiments.
The company CEO, Charlie Scharf, noted, “We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios.”
Disappointing non-interest income, higher provisions and weakness in the mortgage business were the major quarterly headwinds. Yet, results gained from higher net interest income (NII), rising rates, a decline in costs and solid average loan growth.
Net income came in at $3.12 billion, plunging 48% from the prior-year quarter.
NII Improves on Higher Rates & Loans, Costs Fall
Total revenues came in at $17.03 billion, missing the Zacks Consensus Estimate of $17.46 billion. Also, the top line decreased 16% from the year-ago quarter.
Quarterly revenue generation from the business segments was decent on a year-over-year basis. The Consumer Banking and Lending segment’s top line declined 2%, while that of the Commercial Banking segment increased 18%. Further, revenues in the Corporate and Investment Banking and the Wealth and Investment Management units rose 4% and 5%, respectively.
Wells Fargo’s NII came in at $10.2 billion, rising 16%. The increase was mainly driven by a rise in interest rates, higher loan balances, lower mortgage-backed securities premium amortization and a fall in long-term debt. This was partly offset by lower interest income from loans purchased from securitization pools and Paycheck Protection Program (PPP) loans.
Also, net interest margin (on a taxable-equivalent basis) increased 37 basis points to 2.39%.
Non-interest income tanked 40% to $6.8 billion. This was largely due to lower mortgage banking income and investment banking (IB) fees. Also, weak results in its affiliated venture capital and private equity businesses and the impact of divestitures hurt fee income. These were partly offset by robust Markets business performance.
Non-interest expenses were $12.9 billion, down 3% year over year. The decrease was largely due to lower personnel expenses.
WFC’s efficiency ratio of 76% was higher than 66% recorded in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.
As of Jun 30, 2022, average loans were $926.6 billion, growing 3% sequentially. Average deposits came in at $1.45 trillion, down 1%.
Credit Quality: A Mixed Bag
The provision for credit losses was $680 million against a provision benefit of $1.26 billion in the prior-year quarter. This was mainly due to higher loan balance.
Non-performing assets decreased 18% to $6.1 billion. Net charge-offs were $345 million or 0.15% of average loans in the reported quarter, down from $379 million of 0.18% a year ago.
Capital & Profitability Ratios Deteriorate
As of Jun 30, 2022, Tier 1 common equity ratio was 10.3% under Basel III (fully phased-in), down from 12.1% in the corresponding period of 2021.
Return on assets was 0.66%, down from the prior-year quarter’s 1.25%. Return on equity was 7.1%, down from the year-ago quarter’s 13.6%.
Our View
Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. Also, the company is working on its strategic initiatives, which will likely help regain the confidence of its clients and shareholders. Improving loan demand, rise in interest rates and manageable expense levels are encouraging.
Despite a rise in loan demand, WFC is likely to face challenges in improving revenues given the tough operating backdrop due to macroeconomic and geopolitical concerns.
Wells Fargo & Company Price, Consensus and EPS Surprise
Higher reserve build and decline in IB fees affected JPMorgan’s (JPM - Free Report) second-quarter 2022 earnings of $2.76 per share, which missed the Zacks Consensus Estimate of $2.85. The reported quarter’s results included a net credit reserve build of $428 million.
During the second quarter, JPM reported credit costs of $1.1 billion.
Bank of America (BAC - Free Report) is scheduled to announce second-quarter 2022 numbers on Jul 18.
Over the past 30 days, the Zacks Consensus Estimate for BAC’s quarterly earnings has moved 2.5% south to 77 cents, implying a 25.2% decline from the prior-year reported number.
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Wells Fargo (WFC) Q2 Earnings Lag on Provisions, Weak Mortgage
Wells Fargo’s (WFC - Free Report) second-quarter 2022 earnings per share of 74 cents lagged the Zacks Consensus Estimate of 77 cents. Also, the bottom line declined 14% year over year. Results in the reported quarter included a $412 million or 8 cents per share of impairment of equity securities impact.
Shares of WFC have lost almost 1% in pre-market trading on disappointing quarterly performance. The ongoing Russia-Ukraine conflict and macroeconomic concerns, along with disappointing mortgage loan originations (down 36% year over year), seem to be weighing on investor sentiments.
The company CEO, Charlie Scharf, noted, “We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios.”
Disappointing non-interest income, higher provisions and weakness in the mortgage business were the major quarterly headwinds. Yet, results gained from higher net interest income (NII), rising rates, a decline in costs and solid average loan growth.
Net income came in at $3.12 billion, plunging 48% from the prior-year quarter.
NII Improves on Higher Rates & Loans, Costs Fall
Total revenues came in at $17.03 billion, missing the Zacks Consensus Estimate of $17.46 billion. Also, the top line decreased 16% from the year-ago quarter.
Quarterly revenue generation from the business segments was decent on a year-over-year basis. The Consumer Banking and Lending segment’s top line declined 2%, while that of the Commercial Banking segment increased 18%. Further, revenues in the Corporate and Investment Banking and the Wealth and Investment Management units rose 4% and 5%, respectively.
Wells Fargo’s NII came in at $10.2 billion, rising 16%. The increase was mainly driven by a rise in interest rates, higher loan balances, lower mortgage-backed securities premium amortization and a fall in long-term debt. This was partly offset by lower interest income from loans purchased from securitization pools and Paycheck Protection Program (PPP) loans.
Also, net interest margin (on a taxable-equivalent basis) increased 37 basis points to 2.39%.
Non-interest income tanked 40% to $6.8 billion. This was largely due to lower mortgage banking income and investment banking (IB) fees. Also, weak results in its affiliated venture capital and private equity businesses and the impact of divestitures hurt fee income. These were partly offset by robust Markets business performance.
Non-interest expenses were $12.9 billion, down 3% year over year. The decrease was largely due to lower personnel expenses.
WFC’s efficiency ratio of 76% was higher than 66% recorded in the year-ago quarter. An increase in efficiency ratio indicates deterioration in profitability.
As of Jun 30, 2022, average loans were $926.6 billion, growing 3% sequentially. Average deposits came in at $1.45 trillion, down 1%.
Credit Quality: A Mixed Bag
The provision for credit losses was $680 million against a provision benefit of $1.26 billion in the prior-year quarter. This was mainly due to higher loan balance.
Non-performing assets decreased 18% to $6.1 billion. Net charge-offs were $345 million or 0.15% of average loans in the reported quarter, down from $379 million of 0.18% a year ago.
Capital & Profitability Ratios Deteriorate
As of Jun 30, 2022, Tier 1 common equity ratio was 10.3% under Basel III (fully phased-in), down from 12.1% in the corresponding period of 2021.
Return on assets was 0.66%, down from the prior-year quarter’s 1.25%. Return on equity was 7.1%, down from the year-ago quarter’s 13.6%.
Our View
Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. Also, the company is working on its strategic initiatives, which will likely help regain the confidence of its clients and shareholders. Improving loan demand, rise in interest rates and manageable expense levels are encouraging.
Despite a rise in loan demand, WFC is likely to face challenges in improving revenues given the tough operating backdrop due to macroeconomic and geopolitical concerns.
Wells Fargo & Company Price, Consensus and EPS Surprise
Wells Fargo & Company price-consensus-eps-surprise-chart | Wells Fargo & Company Quote
Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance & Earnings Dates of Other Big Banks
Higher reserve build and decline in IB fees affected JPMorgan’s (JPM - Free Report) second-quarter 2022 earnings of $2.76 per share, which missed the Zacks Consensus Estimate of $2.85. The reported quarter’s results included a net credit reserve build of $428 million.
During the second quarter, JPM reported credit costs of $1.1 billion.
Bank of America (BAC - Free Report) is scheduled to announce second-quarter 2022 numbers on Jul 18.
Over the past 30 days, the Zacks Consensus Estimate for BAC’s quarterly earnings has moved 2.5% south to 77 cents, implying a 25.2% decline from the prior-year reported number.