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Will Mortgage Weakness Hurt Wells Fargo's (WFC) Q3 Earnings?

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Wells Fargo (WFC - Free Report) is scheduled to report third-quarter earnings, before the opening bell on Oct 12.

Troubles kept mounting at Wells Fargo since the revelation of the sales scandal in 2016, which was followed by disclosure of issues in its auto insurance business, online bill pay services, wholesale banking unit and the Wealth and Investment Management segment. With the ongoing review process of business practices, more wrongdoings may be reported, consequently straining the top line.

The mortgage business of Wells Fargo is not expected to have performed well in the third quarter as well. With the interest rates moving higher, refinancing activities and fresh originations have been slowing down. Therefore, no major help is expected from this segment. Thus, growth in Wells Fargo’s mortgage banking revenues is likely to have remained low.

Here are the other factors influencing Wells Fargo’s third-quarter results:

Muted Loan Growth: Per the Fed’s latest data, loans growth is likely to have remained muted on a sequential basis during the July-September quarter. Particularly, weakness in commercial and industrial and overall real estate loans might have offset growth in other loans to some extent.

Further, the Fed’s restrictions on Wells Fargo’s balance sheet growth due to past misconducts leave lesser scope for loan growth.

Notably, at a conference held recently, management said that it expects consumer loans to have declined “modestly” on a sequential basis in third-quarter 2018.

Net Interest Income (NII) Under Pressure: NII is expected to grow marginally given the slowdown in loan growth, partially offset by rising net interest margin on rising rates.

Also, the Zacks Consensus Estimate for average interest earning assets of $1.73 trillion for the third quarter indicates a decline of 2.5% year over year. This along with modest lending activities is projected to keep the company’s NII under pressure.

According to management, net interest income is predicted to remain stable sequentially in the third quarter.

Expenses May Trend Higher: Wells Fargo might have recorded escalated costs given its franchise investments in areas, including mobile banking technology, digital lending and brokerage offerings, during the quarter. Moreover, ongoing litigation hassles are expected to have resulted in elevated legal costs.

Non-Interest Revenues to Disappoint: Outflows from the asset-management business are likely to have been recorded due to market declines. Further, persistent trade-war tensions during the quarter kept trading activities muted, which is likely to weigh on the related fees. In addition, trust income might to disappoint on lower equity markets. Also, disappointing mortgage originations will likely hurt Wells Fargo’s mortgage banking fees.

Now, let’s have a look at what our quantitative model predicts:

According to our quantitative model, chances of Wells Fargo beating the Zacks Consensus Estimate in the third quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is -0.26%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings remained unchanged over the last seven days, reflecting year-over-year growth of 12.5%. However, the consensus estimate for sales is projected to be $21.8 billion, down nearly 1%.

Wells Fargo & Company Price and EPS Surprise

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated (CMA - Free Report) is scheduled to release results on Oct 16. It has an Earnings ESP of +0.49% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation (MTB - Free Report) is slated to release results on Oct 17. It has an Earnings ESP of +0.39% and carries a Zacks Rank #3.

State Street Corporation (STT - Free Report) has an Earnings ESP of +0.25% and carries a Zacks Rank of 3. The company is also slated to release results on Oct 19.

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