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Wells Fargo (WFC) Q4 Earnings Improve, Tax Law Benefits

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Wells Fargo & Company’s WFC fourth-quarter 2017 adjusted earnings of 97 cents per share improved from the prior-year quarter earnings of 96 cents. The Zacks Consensus Estimate came in at $1.04.

Including $3.35 billion after-tax benefit, or 67 cents, from the Tax Cuts & Jobs Act, $848 million pre-tax gain, or 11 cents from the sale of Wells Fargo Insurance Services and $3.25 billion pre-tax expense, or 59 cents related to litigation accruals, net income came in at $6.2 billion or $1.16 per share.

Non-interest income recorded growth, partially offset by fall in net interest income. Moreover, expenses soared. Further, reduction in loans acted as headwind for the quarter. Notably, lower mortgage income was also a negative. Improvement in credit quality and steady capital deployment activities were experienced.

For the year ended 2017, earnings per share were $4.10, up 11 cents compared with the prior year. Results also surpassed the Zacks Consensus Estimate of $3.98.

The quarter’s total revenues were $22.1 billion, lagging the Zacks Consensus Estimate of $22.4 billion. However, the figure compared favorably with the prior-year quarter tally of $21.6 billion.

Revenues for the year ended 2017 were $88.4 billion, slightly increasing year over year. However, revenues lagged the Zacks Consensus Estimate of $89 billion.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments was mixed. Community Banking and Wealth and Investment Management segments’ total quarterly revenues increased around 2.6% and 4.9%, respectively, while Wholesale Banking revenues edged down around 1.4%.

Loans & Interest Income Fall, Non-Interest Income Up, Costs Escalate

Wells Fargo’s net interest income in the quarter came in at $12.3 billion, down 1% on a year-over-year basis. Increased interest income from trading assets, investment securities and loans, along with higher other interest income, mainly drove results. Further, net interest margin contracted 3 basis points (bps) year over year to 2.84%.

Non-interest income at Wells Fargo came in at around $9.7 billion, up 6% year over year, primarily due to higher net gains from equity investments and debt securities, partially offset by lower mortgage banking revenues.

As of Dec 31, 2017, total loans were $956.8 billion, down around 1.1% year over year. Reduction in consumer as well as commercial loan portfolio was recorded. Total deposits were $1.3 trillion, up 2% from the prior-year quarter.

Non-interest expense at Wells Fargo was $16.8 billion, up 27% from the year-earlier quarter. The upsurge in expenses primarily stemmed from rise in employee benefits and other expenses. Nonetheless, Wells Fargo remains committed to achieve expense reductions of $4 billion by the end of 2019.

The company’s efficiency ratio of 76.2% came in above the 61.2% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality Improved

Wells Fargo’s credit quality metrics improved in the reported quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $12 billion as of Dec 31, 2017, down 4% year over year.

Provision for credit losses was $651 million, declining 19.1% year over year. Net charge-offs were $751 million or 0.31% of average loans in the fourth quarter, down 17% from the year-ago quarter’s net charge-offs of $805 million (0.37%). Non-performing assets were down 23.7% to $8.7 billion in the quarter under review from $11.4 billion reported in the prior-year quarter.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. In 2017, the company returned $14.5 billion to shareholders through common stock dividends and net share repurchases. Notably, in the reported quarter, the banking giant repurchased 51.4 million shares of its common stock.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $154 billion from $146.4 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.9% under Basel III (fully phased-in) as of Dec 31, 2017, compared with 10.8% recorded in the year-earlier quarter.

Book value per share advanced to $37.44 from $35.18 recorded in the comparable period last year.

Our Viewpoint

Top-line headwinds, aided by lower net interest income, were perceived. Furthermore, flaring up expenses remained a major drag, along with slowdown in mortgage business. Nevertheless, improved credit quality and tax benefit were positives.

Despite several legal tensions, Wells Fargo remains focused on maintaining its financial position. Last year, the banking giant doubled its cost-cutting targets to combat escalating expenses. These efforts might help the company regain confidence of its clients and shareholders.

We believe, over 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. We also anticipate strategic acquisitions and the bank’s efforts to address current adversities will help it expand its business and enhance profitability.

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.

Wells Fargo & Company Price, Consensus and EPS Surprise

Wells Fargo & Company Price, Consensus and EPS Surprise | Wells Fargo & Company Quote

Among other major banks, Citigroup Inc. (C - Free Report) is scheduled to report fourth-quarter results on Jan 16, while Bank of America Corporation BAC and U.S. Bancorp USB on Jan 17.

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