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Wells Fargo's (WFC) Q4 Earnings Beat, Expenses Flare Up
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Driven by interest income, Wells Fargo & Company’s (WFC - Free Report) fourth-quarter 2016 earnings recorded a positive surprise of about 3%. Adjusted earnings of $1.03 per share outpaced the Zacks Consensus Estimate by 3 cents. Moreover, it compared favorably with the prior-year quarter’s earnings of $1.00 per share.
Including net hedge ineffectiveness accounting impact of 7 cents, earnings came in at 96 cents per share.
For the year ended 2016, earnings per share were $3.99, down 13 cents compared with the prior year. Results also lagged the Zacks Consensus Estimate of $4.03.
Wells Fargo witnessed organic growth aided by strong loans and deposit balances, along with elevated interest income. Moreover, a solid capital position, along with returns on assets and equity acted as the key drivers. However, higher expenses and lower non-interest income were a concern.
Notably, reserve release of $100 million was recorded in the reported quarter, driven by improved residential real estate and stabilized oil and gas industry conditions. Fourth-quarter net income came in at $5.3 billion, down 5.4% year over year.
The quarter’s total revenue was $21.6 billion, lagging the Zacks Consensus Estimate of $22.4 billion. Revenues were in line on a year-over-year basis.
Revenues for the year ended 2016 were $88.3 billion, marking a year-over-year increase of 3%. However, revenues lagged the Zacks Consensus Estimate of $89.4 billion.
Furthermore, on a year-over-year basis, revenue generation at the business segments was impressive. Wholesale Banking and Wealth and Investment Management segments’ total quarterly revenue climbed around 9.1% and5.1%, respectively, while Community Banking revenues dipped 4.9%.
Loans and Deposits Rises, Costs Surged
Wells Fargo’s net interest income in the quarter came in at $12.4 billion, up 7% on a year-over-year basis. Increased interest income from trading assets and mortgages held for sale, along with higher other interest income drove results. However, net interest margin contracted 5 basis points year over year to 2.87%.
Non-interest income at Wells Fargo came in at around $9.2 billion, down 8% year over year, mainly due to reduced insurance, mortgage banking revenue, lower net gains from debt securities and lownet gains from equity investments. These negatives were partially mitigated by higher lease income.
As of Dec 31, 2016, total loans were $967.6 billion, increasing 5.6% year over year. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were $1.3 trillion, up 7% from the prior-year quarter.
Non-interest expense at Wells Fargo was $13.2 billion, up 5% from the year-ago quarter. The rise in expenses was primarily stemmed by higher FDIC and other deposit assessments as well as elevated other expenses.
The company’s efficiency ratio of61.2% was above 58.4% recorded in the prior-year quarter and also exceeded the targeted efficiency ratio range of 55%–59%. A rise in efficiency ratio indicates afall in profitability. Wells Fargo hopes efficiency ratio to remain elevated moving ahead.
Credit Quality: Cause of Concern?
Wells Fargo’s credit quality metricswas a mixed bagin the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $12.5 billion as of Dec 31, 2016, in line with the prior-year quarter.
Provision for credit losses was $805 million, down 3.1% year over year. Net charge-offs were $905 million or 0.37% of average loans in the reported quarter, up from the year-ago quarter net charge-offs of $831 million (0.36%). Non-performing assets were down 10.9% to $11.4 billion in the quarter under review from $12.8 billion in the prior-year quarter.
Strong Capital Position
Wells Fargo has maintained a sturdy capital position. In the fourth quarter, the company repurchased 24.9 million shares of common stock and entered into a forward repurchase transaction of 14.7 million shares which settled in Jan 2017.
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $146.4 billion from $142.4 billion in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.7% under Basel III (fully phased-in) as of Dec 31, 2016, compared with 10.8% in the prior-year quarter.
Book value per share increased to $35.18from $33.78 in the prior-year quarter.
Our Viewpoint
Though Wells Fargo has reported decent revenue numbers, we expect top-line headwinds to persist, given the lingering economic recovery. With the thrust of banking regulations, there will be pressure on fees and loan growth. Moreover, a rise in expenses remained a major drag.
Cross-selling, which has been the company’s major strength in recent years, drew regulators’ attention as they discovered that thousands of bank employees were unlawfully enrolling consumers for products and services without their knowledge or consent, in order to receive incentives for meeting the sales targets. This affected retail banking activities during the quarter. The bank has also been subjected to severe political and public outrage and faced several lawsuits and investigations as well.
Further, Wells Fargo has been grappling with restrictions imposed by the U.S. regulators as it failed to “adequately remedy” deficiencies in its resolution plan, better known as “living will,” Notably, this was the second time in 2016 that Wells Fargo failed the “living will” assessment.
By Mar 31, 2017, Wells Fargo is required to file a revised submission, addressing the shortcomings. However, if it fails to address the deficiencies, the regulators will limit the size of the company’s non-bank and broker-dealer assets. Further, if the bank fails to take care of the deficiencies within two years, the regulators may force the company to divest certain assets or operations.
Nevertheless, we believe that in the long term, investors will not be disappointed with their investment in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. Going forward, we believe that strategic acquisitions and the bank’s efforts to address current adversities will help the company expand its business and enhance profitability.
Wells Fargo & Company Price, Consensus and EPS Surprise
Meanwhile, banking major – Bank of America Corporation (BAC - Free Report) – reported fourth-quarter 2016 earnings. Rise in trading revenue as well as mortgage banking fees led to earnings of 40 cents per share, which surpassed the Zacks Consensus Estimate of 38 cents. Further, the figure was 48% higher than the year-ago quarter number.
Impressive growth in fixed income trading revenues, rebound in equity trading and significant rise in mortgage banking income supported revenues. However, as anticipated, investment banking fees declined due to lower advisory fees and equity underwriting fees. In addition, provision for credit losses recorded a fall as energy sector concerns seem to be over. Further, absence of legal costs and efficient expense management were sufficient in aiding the bottom line.
Among other Wall Street giants, U.S. Bancorp (USB - Free Report) is scheduled to report fourth-quarter 2016 earnings on Jan 18, while Comerica Inc. (CMA - Free Report) will report on Jan 17.
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Wells Fargo's (WFC) Q4 Earnings Beat, Expenses Flare Up
Driven by interest income, Wells Fargo & Company’s (WFC - Free Report) fourth-quarter 2016 earnings recorded a positive surprise of about 3%. Adjusted earnings of $1.03 per share outpaced the Zacks Consensus Estimate by 3 cents. Moreover, it compared favorably with the prior-year quarter’s earnings of $1.00 per share.
Including net hedge ineffectiveness accounting impact of 7 cents, earnings came in at 96 cents per share.
For the year ended 2016, earnings per share were $3.99, down 13 cents compared with the prior year. Results also lagged the Zacks Consensus Estimate of $4.03.
Wells Fargo witnessed organic growth aided by strong loans and deposit balances, along with elevated interest income. Moreover, a solid capital position, along with returns on assets and equity acted as the key drivers. However, higher expenses and lower non-interest income were a concern.
Notably, reserve release of $100 million was recorded in the reported quarter, driven by improved residential real estate and stabilized oil and gas industry conditions. Fourth-quarter net income came in at $5.3 billion, down 5.4% year over year.
The quarter’s total revenue was $21.6 billion, lagging the Zacks Consensus Estimate of $22.4 billion. Revenues were in line on a year-over-year basis.
Revenues for the year ended 2016 were $88.3 billion, marking a year-over-year increase of 3%. However, revenues lagged the Zacks Consensus Estimate of $89.4 billion.
Furthermore, on a year-over-year basis, revenue generation at the business segments was impressive. Wholesale Banking and Wealth and Investment Management segments’ total quarterly revenue climbed around 9.1% and5.1%, respectively, while Community Banking revenues dipped 4.9%.
Loans and Deposits Rises, Costs Surged
Wells Fargo’s net interest income in the quarter came in at $12.4 billion, up 7% on a year-over-year basis. Increased interest income from trading assets and mortgages held for sale, along with higher other interest income drove results. However, net interest margin contracted 5 basis points year over year to 2.87%.
Non-interest income at Wells Fargo came in at around $9.2 billion, down 8% year over year, mainly due to reduced insurance, mortgage banking revenue, lower net gains from debt securities and lownet gains from equity investments. These negatives were partially mitigated by higher lease income.
As of Dec 31, 2016, total loans were $967.6 billion, increasing 5.6% year over year. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were $1.3 trillion, up 7% from the prior-year quarter.
Non-interest expense at Wells Fargo was $13.2 billion, up 5% from the year-ago quarter. The rise in expenses was primarily stemmed by higher FDIC and other deposit assessments as well as elevated other expenses.
The company’s efficiency ratio of61.2% was above 58.4% recorded in the prior-year quarter and also exceeded the targeted efficiency ratio range of 55%–59%. A rise in efficiency ratio indicates afall in profitability. Wells Fargo hopes efficiency ratio to remain elevated moving ahead.
Credit Quality: Cause of Concern?
Wells Fargo’s credit quality metricswas a mixed bagin the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $12.5 billion as of Dec 31, 2016, in line with the prior-year quarter.
Provision for credit losses was $805 million, down 3.1% year over year. Net charge-offs were $905 million or 0.37% of average loans in the reported quarter, up from the year-ago quarter net charge-offs of $831 million (0.36%). Non-performing assets were down 10.9% to $11.4 billion in the quarter under review from $12.8 billion in the prior-year quarter.
Strong Capital Position
Wells Fargo has maintained a sturdy capital position. In the fourth quarter, the company repurchased 24.9 million shares of common stock and entered into a forward repurchase transaction of 14.7 million shares which settled in Jan 2017.
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $146.4 billion from $142.4 billion in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.7% under Basel III (fully phased-in) as of Dec 31, 2016, compared with 10.8% in the prior-year quarter.
Book value per share increased to $35.18from $33.78 in the prior-year quarter.
Our Viewpoint
Though Wells Fargo has reported decent revenue numbers, we expect top-line headwinds to persist, given the lingering economic recovery. With the thrust of banking regulations, there will be pressure on fees and loan growth. Moreover, a rise in expenses remained a major drag.
Cross-selling, which has been the company’s major strength in recent years, drew regulators’ attention as they discovered that thousands of bank employees were unlawfully enrolling consumers for products and services without their knowledge or consent, in order to receive incentives for meeting the sales targets. This affected retail banking activities during the quarter. The bank has also been subjected to severe political and public outrage and faced several lawsuits and investigations as well.
Further, Wells Fargo has been grappling with restrictions imposed by the U.S. regulators as it failed to “adequately remedy” deficiencies in its resolution plan, better known as “living will,” Notably, this was the second time in 2016 that Wells Fargo failed the “living will” assessment.
By Mar 31, 2017, Wells Fargo is required to file a revised submission, addressing the shortcomings. However, if it fails to address the deficiencies, the regulators will limit the size of the company’s non-bank and broker-dealer assets. Further, if the bank fails to take care of the deficiencies within two years, the regulators may force the company to divest certain assets or operations.
Nevertheless, we believe that in the long term, investors will not be disappointed with their investment in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. Going forward, we believe that strategic acquisitions and the bank’s efforts to address current adversities will help the company expand its business and enhance profitability.
Wells Fargo & Company Price, Consensus and EPS Surprise
Wells Fargo & Company Price, Consensus and EPS Surprise | Wells Fargo & Company Quote
Currently, Wells Fargo carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, banking major – Bank of America Corporation (BAC - Free Report) – reported fourth-quarter 2016 earnings. Rise in trading revenue as well as mortgage banking fees led to earnings of 40 cents per share, which surpassed the Zacks Consensus Estimate of 38 cents. Further, the figure was 48% higher than the year-ago quarter number.
Impressive growth in fixed income trading revenues, rebound in equity trading and significant rise in mortgage banking income supported revenues. However, as anticipated, investment banking fees declined due to lower advisory fees and equity underwriting fees. In addition, provision for credit losses recorded a fall as energy sector concerns seem to be over. Further, absence of legal costs and efficient expense management were sufficient in aiding the bottom line.
Among other Wall Street giants, U.S. Bancorp (USB - Free Report) is scheduled to report fourth-quarter 2016 earnings on Jan 18, while Comerica Inc. (CMA - Free Report) will report on Jan 17.
The Best Place to Start Your Stock Search
Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>