It has been about a month since the last earnings report for Wells Fargo (WFC). Shares have lost about 1.1% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Wells Fargo's Q4 Earnings Lag Estimates, Revenues Escalate
Wells Fargo’s fourth-quarter 2019 adjusted earnings of 93 cents per share lagged the Zacks Consensus Estimate of $1.12, on lower net interest income and rise in expenses. Results exclude litigation accruals.
Including litigation accruals (not tax-deductible) worth 33 cents per share related to certain matters, earnings came in at 60 cents per share compared with the prior-year quarter’s $1.21.
Reduced net interest income on lower rates and rise in expenses negatively impacted the results. Moreover, provisions soared. However, higher fee income, driven by improved mortgage banking business, was on the upside. Further, escalation in loans and deposits acted as tailwinds.
For the year ended 2019, earnings per share came in at $4.05, down 23 cents, year on year. The reported figure also missed the Zacks Consensus Estimate of $4.53.
Including litigation accruals, net income came in at $2.9 billion in the fourth quarter compared with the $6.1 billion recorded in the prior-year quarter. For 2019, net income was $19.6 billion compared with the $22.4 billion reported in the prior year.
The quarter’s total revenues came in at $19.9 billion, outpacing the Zacks Consensus Estimate of $19.8 billion. The revenue figure, however, came in lower than the prior-year quarter’s tally of $21 billion.
Revenues for the year ended 2019 came in at $85.1 billion, beating the Zacks Consensus Estimate of $84.3 billion. However, revenues edged down 1.5%, year over year.
Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments was mixed. The Community Banking segment’s total quarterly revenues slipped 8.7% and Wholesale Banking revenues were down around 4.3%. Yet, revenues in the Wealth and Investment Management unit were up 2.5%.
Net Interest Income Falls, Costs Up, Fee Income Improves
Wells Fargo’s net interest income in the fourth quarter came in at $11.2 billion, down 11% year over year. Higher interest expense, lower other interest income and reduced interest income from loans held for sale, loans and debt securities resulted in this downside. This was partly offset by increased interest income from equity securities and mortgage loans held for sale. Further, net interest margin shrunk 31 basis points (bps) year over year to 2.53%.
Non-interest income at Wells Fargo came in at around $8.7 billion, up 4% year over year, primarily owing to rise in service charges on deposit accounts, card fees and mortgage banking revenues. These increases were mainly muted by lower revenues from insurance, lease income, other fees and income.
As of Dec 31, 2019, total loans were $962.3 billion, up 1% sequentially. Higher consumer as well as commercial loan portfolio was recorded. Total deposits came in at $1.32 trillion, up 1% from the prior quarter.
Non-interest expense at Wells Fargo was around $15.6 billion in the October-December quarter, up 17% from the year-earlier quarter. This uptick primarily resulted from elevated salaries and commission and incentive compensation, employee benefits, equipment costs and other expenses. These were partly offset by lower core deposit and other intangibles, along with FDIC and other deposit assessments.
The company’s efficiency ratio of 78.6% came in above the 63.6% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.
Credit Quality: A Mixed Bag
Wells Fargo’s credit quality metrics was a mixed bag in the December-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.5 billion as of Dec 31, 2019, down 1.9% year over year.
Net charge-offs were $769 million or 0.32% of average loans in the reported quarter, up 6.7% from the year-ago quarter’s net charge-offs of $721 million (0.30%). Non-performing assets slipped 18.8% to $5.6 billion in the fourth quarter, from the $6.9 billion reported in the prior-year quarter. Notably, provision for credit losses was $644 million, 24% higher.
Strong Capital Position
Wells Fargo has maintained a sturdy capital position. During the October-December period, the company returned $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 $138.8 billion from the $146.4 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.1% under Basel III (fully phased-in) as of Dec 31, 2019, down from 11.7% in the year-earlier quarter.
Book value per share advanced to $40.31 from the $38.06 recorded in the comparable period last year.
Return on assets was 0.59%, down from the prior-year quarter’s 1.28%. Return on equity was 5.91%, down from the year-ago quarter’s 12.89%.
Current expected credit loss (CECL) adoption
Wells Fargo expects to recognize a $1.3-billion reduction in allowance for credit losses (ACL) and a corresponding increase in retained earnings (before tax) related to the adoption of CECL on Jan 1, 2020, predominantly reflecting:
- Commercial ACL expected to be $2.9 billion lower under CECL, reflecting shorter contractual maturities and the benign credit environment.
- Consumer ACL expected to be $1.5 billion higher under CECL reflecting longer or indeterminate maturities, net of recoveries in collateral value predominantly related to residential mortgage loans, which had previously been written down significantly below the current recovery value.
Based on the current interest-rate environment, management expects MBS premium amortization to be relatively stable in the first quarter and then beginning declining, although it is expected to be higher in full-year 2020 compared with 2019.
Management expects NII to decline in the low to mid-single digits in 2020 influenced by a number of factors including loan and deposit growth rates, pricing spreads, the level of interest rates and the shape of the yield curve.
Mortgage originations for the first quarter are expected to be lower due to normal seasonality.
Seasonally higher personnel expenses are anticipated in the first quarter, reflecting incentive compensation and employee benefits expense.
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 estimates revision. The consensus estimate has shifted -12.11% due to these changes.
At this time, Wells Fargo has a poor Growth Score of F, 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 D. 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.