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Can Wells Fargo (WFC) Q4 Earnings Hide Mortgage Weakness?

Zacks

The projected decline in Wells Fargo & Company’s WFC mortgage business will likely impact its fourth-quarter earnings given significant dependence of its top line on this source. However, this might not lead the company to report dismal results on Jan 12. Benefits of higher rates and loan growth are anticipated to be positive factors.

Wells Fargo’s mortgage banking revenues are expected to be low resulting from seasonality that might be eased due to immaterial negative MSR valuation adjustments. Notably, expectations of a higher rate environment might have encouraged refinancing activities during the quarter under review. Nevertheless, with the refinance boom nearing its end, no major help is expected from this segment.

Here are the other factors influencing Q4 results:

Loan Growth: Per the Federal Reserve’s latest data, loans are expected to be in line on a sequential basis during the fourth quarter. Particularly, weakness in commercial and industrial (C&I) loan growth will likely be offset by rising consumer loans. However, the auto portfolio run-off is likely to continue into the near term on tightening of underwriting standards by Wells Fargo. Also, the bank is cutting back its auto lending business amid stressful markets and adherence of more centralized risk controls.

Rise in Net Interest Income: In addition to higher interest rates, a moderate improvement in lending might perk up interest income. Notably, management projects NII to grow in low- to mid-single digits for 2017.

Expenses May Trend Higher: Wells Fargo may record escalated costs given its franchise investments in areas, including mobile banking technology, digital lending and brokerage offerings. Wells Fargo anticipates the efficiency ratio to be around 61% in 2017, excluding the $1-billion discrete litigation accrual recorded in third-quarter 2017 and any other non-recurring expenses. Further, the company is targeting around $4 billion of cost savings by 2019. Of the total cost savings target, 21% is expected to be achieved in 2017.

Adverse impact of new tax code: The tax reform might result in elevated operating expenses from one-time bonus payments, higher charitable contributions and investment losses from securities portfolio restructurings. Also, though the company has not providing any information about the write-down of deferred tax assets (DTAs), it might record a significant one-time charge in the to-be-reported quarter.

Why a Likely Positive Surprise?

Our proven model indicates that chances of Wells Fargo beating the Zacks Consensus Estimate is high as it has the right combination of the two key ingredients — positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold).

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

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at +0.76%. This is a very significant and leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: The combination of Wells Fargo’s Zacks Rank #3 and a positive ESP makes us confident of an earnings beat.

The Zacks Consensus Estimate for the to-be-reported quarter remained unchanged over the last seven days and is expected to grow 0.97% year over year. Moreover, the Zacks Consensus Estimate for sales is projected at $22.4 billion, up 3.9% year over year.


Other Stocks That Warrant a Look

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

Huntington Bancshares Incorporated HBAN is slated to release results on Jan 23. The company has an Earnings ESP of +1.90% and sports a Zacks Rank of 1. You can seethe complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for The PNC Financial Services Group, Inc. PNC is +0.55% and it carries a Zacks Rank of 2. The company is scheduled to release results on Jan 12.

State Street Corporation STT has an Earnings ESP of +0.34% and carries a Zacks Rank of 2. It is slated to report results on Jan 23.

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