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NII, Fee Income to Drive Wells Fargo's (WFC) Q3 Earnings
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Wells Fargo & Company (WFC - Free Report) is slated to announce third-quarter 2022 results, before the opening bell, on Oct 14. The company’s earnings and revenues are expected to have declined year over year.
In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate on disappointing non-interest income, higher provisions and weakness in the mortgage business.
Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on three occasions and missed on the other, the surprise being 11.24%, on average.
Let’s now look at the other factors that are expected to have influenced Wells Fargo’s third-quarter earnings.
Loans and Net Interest Income (NII): While lending activity improved sequentially in the third quarter, the pace of loan growth across most categories slowed as the quarter progressed. Per the Fed’s latest data, commercial and industrial loans, real estate loans, and consumer loans slightly moderated in July and August from the second quarter. Encouragingly, commercial real estate loan growth accelerated in the quarter under review.
Also, in the third quarter, the Fed hiked interest rates by 150 basis points, resulting in a policy rate of 3.0-3.25%, the highest level since 2008. Hence, decent loan growth and interest rate hikes are likely to have driven the bank’s earnings asset yields, margin and NII in the quarter.
Amid the considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $11.57 billion, suggesting a 13.5% rise from the prior quarter’s reported figure.
Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to decline in the third quarter. Mortgage banking revenues have been facing tough comps from the prior year that was propelled by low mortgage rates.
However, in the third quarter, mortgage rates increased, with the rate on the 30-year fixed mortgage crossing the 6% mark in September. The climb in mortgage rates has led to a smaller origination market. Hence, being one of the largest bank mortgage lenders in the United States, the company is likely to have continued seeing declines in its home lending portfolio and mortgage banking income.
The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $292 million for the third quarter, suggesting a 1.7% rise from the prior quarter’s reported number.
Overall Non-Interest Revenues:Wells Fargo’s investment advisory and other asset-based fee revenues are likely to have borne the brunt of the lag effect from weaker equity and fixed-income market performance in the second quarter. A dip in market valuations and lower transactional activity are expected to have been headwinds in the third quarter. The consensus mark for trading revenues is pegged at $2.17 billion, implying a sequential decrease of 7.4%.
The company is expected to see lower deposit-related fees, reflecting the implementation of overdraft policy changes and fee waivers.
Raging inflation, equity market rout and fears of recession resulted in disappointing equity market performance. Thus, the IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. While global deal-making hit a record low for the third consecutive quarter, Wells Fargo is expected to have fared decently on the mergers and acquisitions front. Accordingly, the consensus mark for investment banking fees is pegged at $412 million, implying a sequential increase of 44%.
The Zacks Consensus Estimate for Wells Fargo’s total fee income is pegged at $7.17 billion for the third quarter, suggesting a 5.1% rise from the prior quarter’s reported number.
Expenses: Wells Fargo’s costs are expected to have continued to flare up in the third quarter, given its franchise investments in technology, digitalization efforts and the announced settlement with the U.S. Department of Labor related to its 401(k) plan contributions. 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 third quarter.
Asset Quality: With loan growth, expectations of a worsening macroeconomic outlook and growing recession risk, Wells Fargo is expected to have continued building reserves in the third quarter. The provision for credit losses was $680 million in the second quarter.
The Zacks Consensus Estimate for non-performing assets of $6.67 billion implies a 9.6% increase sequentially.
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 are reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Wells Fargo is -0.62%.
The Zacks Consensus Estimate for third-quarter earnings has been revised marginally downward to $1.09 over the past week. Also, it suggests a year-over-year decline of 6.8%.
Also, the consensus estimate of $18.67 billion for quarterly revenues indicates a marginal fall from the prior-year quarter’s reported number.
Stocks That Warrant a Look
BankUnited (BKU - Free Report) and Associated Banc-Corp (ASB - Free Report) are a few 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 BKU is +1.32% and the company carries a Zacks Rank #3 at present. BKU is slated to report third-quarter 2022 results on Oct 20.
Associated Banc-Corp is scheduled to release third-quarter 2022 earnings on Oct 20. ASB, with a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +2.39%.
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NII, Fee Income to Drive Wells Fargo's (WFC) Q3 Earnings
Wells Fargo & Company (WFC - Free Report) is slated to announce third-quarter 2022 results, before the opening bell, on Oct 14. The company’s earnings and revenues are expected to have declined year over year.
In the last reported quarter, the company’s earnings missed the Zacks Consensus Estimate on disappointing non-interest income, higher provisions and weakness in the mortgage business.
Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on three occasions and missed on the other, the surprise being 11.24%, 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 third-quarter earnings.
Loans and Net Interest Income (NII): While lending activity improved sequentially in the third quarter, the pace of loan growth across most categories slowed as the quarter progressed. Per the Fed’s latest data, commercial and industrial loans, real estate loans, and consumer loans slightly moderated in July and August from the second quarter. Encouragingly, commercial real estate loan growth accelerated in the quarter under review.
Also, in the third quarter, the Fed hiked interest rates by 150 basis points, resulting in a policy rate of 3.0-3.25%, the highest level since 2008. Hence, decent loan growth and interest rate hikes are likely to have driven the bank’s earnings asset yields, margin and NII in the quarter.
Amid the considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $11.57 billion, suggesting a 13.5% rise from the prior quarter’s reported figure.
Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to decline in the third quarter. Mortgage banking revenues have been facing tough comps from the prior year that was propelled by low mortgage rates.
However, in the third quarter, mortgage rates increased, with the rate on the 30-year fixed mortgage crossing the 6% mark in September. The climb in mortgage rates has led to a smaller origination market. Hence, being one of the largest bank mortgage lenders in the United States, the company is likely to have continued seeing declines in its home lending portfolio and mortgage banking income.
The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $292 million for the third quarter, suggesting a 1.7% rise from the prior quarter’s reported number.
Overall Non-Interest Revenues:Wells Fargo’s investment advisory and other asset-based fee revenues are likely to have borne the brunt of the lag effect from weaker equity and fixed-income market performance in the second quarter. A dip in market valuations and lower transactional activity are expected to have been headwinds in the third quarter. The consensus mark for trading revenues is pegged at $2.17 billion, implying a sequential decrease of 7.4%.
The company is expected to see lower deposit-related fees, reflecting the implementation of overdraft policy changes and fee waivers.
Raging inflation, equity market rout and fears of recession resulted in disappointing equity market performance. Thus, the IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. While global deal-making hit a record low for the third consecutive quarter, Wells Fargo is expected to have fared decently on the mergers and acquisitions front. Accordingly, the consensus mark for investment banking fees is pegged at $412 million, implying a sequential increase of 44%.
The Zacks Consensus Estimate for Wells Fargo’s total fee income is pegged at $7.17 billion for the third quarter, suggesting a 5.1% rise from the prior quarter’s reported number.
Expenses: Wells Fargo’s costs are expected to have continued to flare up in the third quarter, given its franchise investments in technology, digitalization efforts and the announced settlement with the U.S. Department of Labor related to its 401(k) plan contributions. 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 third quarter.
Asset Quality: With loan growth, expectations of a worsening macroeconomic outlook and growing recession risk, Wells Fargo is expected to have continued building reserves in the third quarter. The provision for credit losses was $680 million in the second quarter.
The Zacks Consensus Estimate for non-performing assets of $6.67 billion implies a 9.6% increase sequentially.
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 are reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Wells Fargo is -0.62%.
Zacks Rank: Wells Fargo currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for third-quarter earnings has been revised marginally downward to $1.09 over the past week. Also, it suggests a year-over-year decline of 6.8%.
Also, the consensus estimate of $18.67 billion for quarterly revenues indicates a marginal fall from the prior-year quarter’s reported number.
Stocks That Warrant a Look
BankUnited (BKU - Free Report) and Associated Banc-Corp (ASB - Free Report) are a few 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 BKU is +1.32% and the company carries a Zacks Rank #3 at present. BKU is slated to report third-quarter 2022 results on Oct 20.
Associated Banc-Corp is scheduled to release third-quarter 2022 earnings on Oct 20. ASB, with a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +2.39%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.