A month has gone by since the last earnings report for Wells Fargo (WFC Quick QuoteWFC - Free Report) . Shares have added about 3.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Wells Fargo due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Wells Fargo Misses on Q3 Earnings, Shows Cost Control

Impacted by lower mortgage banking revenues, Wells Fargo recorded a negative earnings surprise of 3.4% in third-quarter 2018. Earnings of $1.13 per share missed the Zacks Consensus Estimate of $1.17. However, the bottom-line compared favorably with 83 cents recorded in the prior-year quarter.

Including non-recurring items, net income for the quarter came in at $6 billion compared with $4.5 billion reported a year ago.

Lower provisions and higher net interest income aided results. Moreover, expenses declined. However, reduced fee income was an undermining factor. Further, reduction in loans and deposits acted as headwinds in the quarter.

The quarter’s total revenues came in at $21.9 billion, in line with the Zacks Consensus Estimate. Also, the reported figure compared favorably with the prior-year quarter figure of $21.8 billion.

On a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues increased 2.6%, Wholesale Banking revenues were down 2.7% and revenues in the Wealth and Investment Management unit dipped nearly 1%.

Loans & Non-Interest Income Fall, Costs Decline, NII Improves

Wells Fargo’s net interest income (NII) in the third quarter came in at $12.6 billion, up 1% year over year. Increased interest income from debt securities, mortgages held for sale, loans, equity securities, along with higher other interest income, were mostly offset by higher interest expenses. Further, net interest margin expanded 8 bps year over year to 2.94%.

Non-interest income at Wells Fargo came in at $9.4 billion, down marginally year over year, primarily due to fall in almost all components of income, including mortgage banking and insurance income. This was partly offset by net gains from trading activities and equity securities.

As of Sep 30, 2018, total loans were $942.3 billion, down around 1% year over year. This was contributed by reduction in consumer loans, partly offset by higher commercial loans. Total deposits came in at $1.3 trillion, down 3.1% from the prior-year quarter.

Non-interest expenses at Wells Fargo were around $13.8 billion, down 4% from the year-earlier quarter. This decline in costs primarily stemmed from fall in commission and incentive compensation, along with lower other expenses. Notably, decreased operating losses mainly related to non-litigation expenses remained a positive.

The company’s efficiency ratio of 62.7% came in below 65.7% recorded in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.

Credit Quality Improves

Wells Fargo’s credit quality metrics improved in the third quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $11 billion as of Sep 30, 2018, down 9.5% year over year.

Provision for credit losses was $580 million, falling 19%. Net charge-offs were $680 million or 0.29% of average loans in the third quarter, down 5.2% from the year-ago quarter’s net charge-offs of $717 million (0.30%). Non-performing assets were down 18.8% to $7.6 billion from $9.3 billion reported a year ago.

Capital Position

Wells Fargo has maintained a strong capital position. In the July-September quarter, the company returned $8.9 billion to shareholders through common stock dividends and net share repurchases.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $148.8 billion from $152.6 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 Sep 30, 2018, compared with 11.8% recorded in the year-earlier quarter.

Book value per share advanced to $37.55 from $36.92 recorded a year ago.

Outlook

Fourth-quarter 2018

Management currently projects the fourth-quarter 2018 effective income tax rate to be approximately 19%.

Mortgage originations for the quarter are expected to be down due to seasonality in the purchase market. Pricing margins remain historically tight due to excess capacity in the industry. Further, despite stabilization in pricing margins in recent quarters, production margin is expected to be within this year’s quarterly range of 77 to 97 bps.

Based on trends in customer behavior, Wells Fargo accelerated branch closures since 2016. The company remains confident to complete the divesture of 52 branches in Indiana, Ohio, Michigan and part of Wisconsin in the fourth-quarter 2018.

Full-Year 2018

Net interest income is expected to be up modestly in 2018, reflecting better-than-expected deposit betas.

On technology advancement and other factors, total branch network is expected to decline to around 5,000 by the end of 2020. Wells Fargo is also reducing properties and other businesses, including standalone mortgage locations which stand by more than 10% in 2017, and transitioning operational activities in auto business from 57 regional banking centers into three larger regional sites. The consolidation is likely to be completed in 2018.

The bank is on track to achieve the targeted $4 billion of expense reductions. An initial $2 billion of targeted expense savings is expected by year-end 2018, supporting the company’s ongoing investment in the businesses, which includes a number of key areas, such as enhancing the compliance and risk management capability, building a better bank and strengthening core infrastructure.

These projected savings do not include the completion of core deposit intangible amortization expense at the end of 2018, which will amount to $769 million in full-year 2018, and also does not include completion of the FDIC special assessment which is anticipated by the end of 2018. Additionally, expense savings due to business divestitures are excluded.

Management anticipates full-year 2018 total expenses of $53.5-$54.5 billion. This expectation includes approximately $600 million of operating losses in 2018, and excludes any outside litigation and remediation accruals or penalties.

Further, quarterly efficiency ratio above 59% is estimated by the end of 2018, excluding any outside litigation accruals.

Near-term

Management estimates the additional $2-billion targeted annual expense reductions by the end of 2019 to trickle down to the bottom line and be fully recognized in 2020.

Also, expenses are projected to be in the $52-$53 billion range for 2019 and $50-$51 billion range for 2020.

Moreover, ROE is anticipated to be 12-15% over the next two years, while ROTCE is expected to be 14-17%.

After declining for five consecutive quarters, auto originations have stabilized over the past three quarters. With completion of the centralization of collection and funding activities, the bank is positioned to start increasing originations over time, and currently expects the portfolio of balances to begin growing in mid-2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, Wells Fargo has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Wells Fargo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.