A month has gone by since the last earnings report for Wells Fargo (WFC - Free Report) . Shares have lost about 1.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Wells Fargo due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Wells Fargo Q1 Earnings Beat on Low Expenses
Driven by prudent expense management, Wells Fargo recorded a positive earnings surprise of 11.1% in first-quarter 2019. Earnings of $1.20 per share surpassed the Zacks Consensus Estimate of $1.08. Results also came in above the prior-year quarter adjusted earnings of $1.12.
Higher net interest income and fall in expenses aided the company’s performance. However, reduced fee income was an undermining factor. Moreover, provisions soared. Further, reduction in loans and deposits acted as headwinds.
Net income came in at $5.5 billion compared with $4.7 billion in the prior-year quarter.
The quarter’s total revenues came in at $21.6 billion, outpacing the Zacks Consensus Estimate of $20.9 billion. However, the reported figure compares unfavorably with the prior-year quarter’s tally of $21.9 billion.
Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues edged down around 1%, Wholesale Banking revenues were down around 2.7%, and revenues in the Wealth and Investment Management unit dipped 2.4%.
Loans & Fee Income Fall, Costs Down, NII Improves
Wells Fargo’s net interest income in the quarter came in at $12.3 billion, up 1% year over year. Increased interest income from debt securities, loans along with higher other interest income, were mostly offset by higher interest expense. Furthermore, net interest margin expanded 7 basis points (bps) year over year to 2.91%.
Non-interest income at Wells Fargo came in at around $9.3 billion, down 4% 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 equity and trading securities, along with higher card fees.
As of Mar 31, 2019, total loans were $948.2 billion, down around 0.5% sequentially. Reduction in consumer as well as commercial loan portfolio was recorded. Total deposits came in at $1.3 trillion, down 1.6% from the prior quarter.
Non-interest expense at Wells Fargo was around $13.9 billion, down 7% from the year-earlier quarter. This decline in expenses primarily resulted from lower core deposit and other intangibles, FDIC and other deposit assessments and other expenses. These were partly offset by rise in salaries and commission, and incentive compensation, along with elevated employee benefits and equipment costs. Wells Fargo remains committed to achieve expense reduction of $4 billion by the end of 2019.
The company’s efficiency ratio of 64.4% came in below the 68.6% recorded in the year-ago quarter. A fall in efficiency ratio indicates a rise in profitability.
Credit Quality Improves
Wells Fargo’s credit quality metrics improved in the Mar-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.8 billion as of Mar 31, 2019, down 4.4% year over year.
Net charge-offs were $695 million or 0.30% of average loans in the reported quarter, down 6.2% from the year-ago quarter’s net charge-offs of $741 million (0.32%). Non-performing assets went down 7.6% to $7.3 billion, in the quarter under review, from $7.9 billion reported in the prior-year quarter. Notably, provision for credit losses was $845 million, significantly higher due to reserve build.
Strong Capital Position
Wells Fargo has maintained a sturdy capital position. In the Jan-Mar quarter, the company returned $6 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 billion from $152.3 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 Mar 31, 2019, in line with the year-earlier quarter.
Book value per share advanced to $39.01 from $37.17 recorded in the comparable period last year.
Mortgage originations for the quarter are expected to be up due to seasonality for home buying, along with some additional refinance activity which resulted from the recent decrease in mortgage interest rates. Production margin is expected to be within the range of last two quarters.
The company expects effective income tax rate to be about 18%, excluding the impact of any unanticipated discrete items.
Management expects NII to be down 2-5% compared with 2018 due to a flatter curve, tightening loan spreads, resulting from a competitive market with ample liquidity and continued upward pressure on deposit pricing.
Per management, the bank’s strategic and financial targets beyond 2019 will be established once a permanent CEO comes in place. Therefore, currently, the bank focuses on cost-saving initiatives.
Also, expenses are projected to be in the $52-$53 billion range for 2019, excluding annual operating losses in excess of $600 million such as litigation and remediation accruals and penalties. For 2020, expenses are expected in $50-$51 billion range.
Moreover, ROE is anticipated to be 12-15% over the next two years (ended 2020), while ROTCE is expected to be 14-17%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Wells Fargo has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Wells Fargo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.