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Wells Fargo (WFC) Tops Q3 Earnings, Costs & Provisions Up


Buoyed by a strong top-line growth, Wells Fargo & Company’s WFC third-quarter 2016 recorded a positive earnings surprise of about 1%. Specifically, the company’s earnings of $1.03 per share beat the Zacks Consensus Estimate by a penny. However, it compared unfavorably with the prior-year quarter’s earnings of $1.05 per share.

Wells Fargo witnessed organic growth in revenues. Moreover, a strong capital position acted as a tailwind. However, higher provisions and expenses were the dampeners.

Notably, the company did not witness any reserve build or release during the quarter, consistent with the third quarter of 2015. Third-quarter net income applicable to common stock came in at $5.2 billion, down 4% year over year.

Revenues & Expenses Witness a Rise

The quarter’s total revenue came in at $22.3 billion, surpassing the Zacks Consensus Estimate of $22 billion. Revenues also grew around 2% on a year-over-year basis.

Furthermore, on a year-over-year basis, revenue generation at the business segments was impressive. Wealth and Investment Management, and the Wholesale Banking segments’ total quarterly revenue jumped around 5.7% and 13%, respectively. However, Community Banking segment’s revenues decreased 4.2%.

Wells Fargo’s net interest income in the quarter came in at approximately $12 billion, up 4% yearoveryear. Increased interest income from trading assets and other interest income drove the results. However, net interest margin decreased 14 basis points year over year to 2.82%, primarily due to growth in long-term debt and deposits, partially offset by the benefit of earning asset growth.

Non-interest income came in at around $10.4 billion, almost in line with the prior-year quarter. Lease income and other non-interest income increased while there was a fall in net gains from equity investments and debt securities.

On the other hand, non-interest expense at Wells Fargo was $13.3 billion, up 7% from the prior-year quarter. The rise in expenses was primarily due to higher employee benefits and FDIC and other deposit assessment-related expenses.

The company’s efficiency ratio was 59.4%, up from 56.7% recorded in the prior-year quarter and above the targeted efficiency ratio range of 55–59%. A rise in efficiency ratio indicates a fall in profitability. Wells Fargo expects the efficiency ratio to remain at an elevated level, going forward.

Loans and Deposits Rise

As of Sep 30, 2016, total loans were $961.3 billion, almost in line with the prior quarter. Total deposits were $1.3 trillion, up 2% from the prior quarter.

Credit Quality: A Cause of Concern?

Allowance for credit losses, including the allowance for unfunded commitments, totaled $12.7 billion as of Sep 30, 2016, increasing from $12.6 billion as of Sep 30, 2015.

Provision for credit losses was $805 million, up 14.5% year over year. Net charge-offs were $805 million or 0.33% of average loans in the reported quarter, up from the prior-year quarter net charge-offs of $703 million (0.31%). Nonetheless, non-performing assets fell 9.8% to $12.0 billion in the quarter from $13.3 billion in the prior-year quarter.

Strong Capital Position

The company purchased 38.3 million shares of its common stock in the third quarter.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $147.8 billion from $141.8 billion in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.7% under Basel III (fully phased-in) as of Sep 30, 2016, up 10 basis points from the prior quarter.

Book value per share increased to $35.81 from $33.69 in the prior-year quarter.

Our Viewpoint

Though Wells Fargo has reported an earnings beat for the quarter, major headwinds in the form of persistent investigations and lawsuits from the investors and regulators continue to be a concern for the company. Notably, the company recently entered a $190-million settlement to resolve regulators’ claims of illegally opening millions of unauthorized accounts.

‘Cross-selling,’ which has been the company’s key strength in the recent years, drew regulators’ attention as they found out that thousands of employees of the bank were unlawfully enrollingconsumers forproducts and services without their knowledge or consent, in order to receive incentives for meeting the sales targets.

The bank has terminated concerned employees and also will remove all product sales goals in retail banking, effective Jan 1, 2017. Also, a new CEO has been named for taking necessary steps to address the issue. Further, the bank has instructed several of its call center employees to temporarily suspend cross-selling of products.

Such measures are likely to slow account openings, which consequently would result in reduced revenues. Eliminating sales targets while adjusting incentives may soften the growth in deposit service charges and credit-card fees. Moreover, this settlement sparked criticism while related potential lawsuits and further probes will add to the woes. Additionally, the company faces suspension of business relations with states including Illinois and California and cities such as Chicago and Seattle.

Nonetheless, we believe that Wells Fargo will eventually be able to regain investors’ confidence with the help of its persistent initiatives to solve the matter. Further, with its diverse geographic and business mix, Wells Fargo will be able to sustain consistent earnings growth. Going forward, we believe that strategic acquisitions will also help the company to expand its business and enhance profitability.

WELLS FARGO-NEW Price, Consensus and EPS Surprise

WELLS FARGO-NEW Price, Consensus and EPS Surprise | WELLS FARGO-NEW Quote

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.

Meanwhile, banking major – JPMorgan Chase & Co. JPM – which kick-started the third-quarter earnings today, reported earnings of $1.58 per share, outpacing the Zacks Consensus Estimate of $1.40. Results were driven by improved trading and mortgage banking revenues. However, the figure reflects a 6% decline from the year-ago period. Notably, the results included a legal benefit of $71 million.

Among the other Wall Street giants, Bank of America Corp. BAC is scheduled to report third-quarter 2016 earnings on Oct 17, while Comerica Inc. CMA will report on Oct 18.

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