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Will Wells Fargo (WFC) Q1 Earnings Overcome Legal Issues?

Zacks

Wells Fargo WFC is scheduled to report first-quarter earnings, before the opening bell on Apr 13.

This San Francisco-based banking giant has been in the news on a regular basis, following the sales scam that surfaced in September 2016. The revelation of the fake account scandal that marked the beginning of numerous problems for the bank was followed by the disclosure of issues in the bank’s auto insurance business and online bill pay services.

Therefore, the bank has been subjected to severe political and public outrage, and faced several lawsuits and investigations as well.

To add to the woes, during the first quarter, the Federal Reserve ordered the bank to replace four board directors and also not increase its assets position beyond $1.95 trillion (as of Dec 31, 2017). The Fed’s action demonstrates poor governance, compliance and risk management of Wells Fargo associated with the sales practices scandal, as well as mishandling of auto-insurance and mortgage fees.

Notably, the firm is restricted from growth until governance and risk management improve. However, the bank is allowed to continue with current banking activities.

Mortgage business, the primary source of revenue for Wells Fargo, is expected to witness a slowdown in the first quarter. With the interest rates moving higher, refinancing activities have been slowing down. Therefore, no major help is expected from this segment. Thus, growth in Wells Fargo’s mortgage banking revenues is expected to be low.

Here are the other factors influencing Wells Fargo’s Q1 results:

Loan Growth: Per the Fed’s latest data, loans are expected to improve slightly on a sequential basis during the to-be-reported quarter. Particularly, weakness in revolving home equity loans might offset growth in commercial and industrial (C&I), consumer and overall real estate loans to some extent.

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.

Notably, in first-quarter 2018, management expects loan growth to be impacted by seasonally lower mortgage origination and credit card balances. Additionally, based on the current pricing trends and channel mix in held-for-sale pipeline, the gain on sale margin is expected to decline.

Rise in Net Interest Income: In addition to higher interest rates, a moderate improvement in lending might perk up interest income.

Expenses May Trend Higher: Wells Fargo might record escalated costs given its franchise investments in areas, including mobile banking technology, digital lending and brokerage offerings. Moreover, high legal costs might be witnessed due to ongoing litigation hassles.

Non-Interest Revenues to Grow Modestly: Outflows from the asset-management business will likely be recorded on market declines. However, driven by high volatility, trading activity is expected to improve marginally in the quarter and rise in trust income is anticipated on higher equity markets.

Why a Likely Positive Surprise?

Our proven model indicates that chances of Wells Fargo beating the Zacks Consensus Estimate are high as it has the right combination of the two key ingredients — positive Earnings ESP, and 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 +0.73%. 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’s earnings remained stable over the last seven days and is expected to be up 7% year over year. However, the Zacks Consensus Estimate for sales is projected at $21.7 billion, down 1.5% year over year.

Other Stocks That Warrant a Look

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

U.S. Bancorp USB is slated to release results on Apr 18. The company has an Earnings ESP of +0.56% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank MTB is +0.15% and it carries a Zacks Rank of 2. The company is scheduled to release results on Apr 16.

BB&T Corporation BBT has an Earnings ESP of +1.37% and carries a Zacks Rank of 3. It is slated to report results on Apr 19.

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