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Will Q3 Earnings Pull Wells Fargo (WFC) Stock Down Further?

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Wells Fargo & Company (WFC - Free Report) is scheduled to report third-quarter 2016 results on Oct 14.

The San Francisco-based banking giant has been dominating headlines following the sales scam that surfaced last month. The bank has been at the center of severe political and public outrage and has been hit with several lawsuits and investigations. Further, the bank’s business relations with states, including Illinois and California, have been suspended.

However, chief financial officer of the bank – John Shrewsberry – stated that business suspension by the states over the scam would not affect its third-quarter earnings "much", according to a recent a recent report by The Wall Street Journal, citing a recording of an internal call. The bank will only record “some legal set asides” in the upcoming release.

Shares of Wells Fargo lost over 9% since the announcement of the $190-million settlement on Sep 8 to resolve regulators’ claims of illegally opening millions of unauthorized accounts. Year to date, the stock is down more than 16%.

WELLS FARGO-NEW Price and EPS Surprise

 

Will the upcoming earnings release put further pressure on the stock? Notably, Wells Fargo delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 0.5%. However, our quantitative model doesn’t call for an earnings beat this time around. Also, the Zacks Consensus Estimate of $1.02 per share for the third quarter indicates a year-over-year decline of more than 2%.

Here is what our model indicates:

A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing chances of an earnings beat.

Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Wells Fargo is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at $1.02.

Zacks Rank: Wells Fargo’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise

Factors to Influence Q3 Results

Benefit from Mortgage Business Momentum:  Wells Fargo – one of the largest mortgage lenders in the nation – might exhibit an improvement in its mortgage banking revenues. Management expects mortgage origination volume to increase in the third quarter, reflecting normal seasonality and strength in the housing sector as well as mortgage banking segment. Further, Brexit, along with decrease in mortgage rates, will lead to rise in origination volume in the quarter, on a sequential basis.

Continued Pressure on Net Interest Margin (NIM): The persistent low rate environment has taken a toll on the bank’s margins. As the Fed did not take any step in raising the interest rates further, the company is not likely to record improvement in its NIM in the quarter.

Expenses May Trend Higher: After the finalization of the FDIC rule, the company estimates surcharge, along with the previously approved base rate reduction, to increase the total FDIC assessment by about $100 million per quarter, starting in third-quarter 2016. Moreover, the bank may record increased costs given its franchise investments in areas, including mobile banking technology, digital lending, brokerage offerings and regulation and compliance.

Muted Loan Growth: According to recent data from the Federal Reserve, commercial and industrial loans across the industry were flat during the quarter compared with second-quarter 2016. This may have kept the overall loan growth subdued. As expanding loans was one of the major ways to offset margin pressure for major banks including Wells Fargo in the last few quarters, third-quarter results might reflect considerable revenue pressure.

Benign Energy Headwinds: Given the rebound in oil prices that hit rock bottom in February, the provision to cover potential losses tied with energy loans should not be significant.

Stocks that Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Synovus Financial Corporation (SNV - Free Report) has an Earnings ESP of +2.00% and carries a Zacks Rank #3. It is scheduled to report results on Oct 18. You can see the complete list of today’s Zacks #1 Rank stocks here.

BlackRock, Inc. (BLK - Free Report) has an Earnings ESP of +0.40% and carries a Zacks Rank #2. The company is slated to release results on Oct 18.

Raymond James Financial, Inc. (RJF - Free Report) has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

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