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Wells Fargo (WFC) Q2 Earnings Miss, Fee Income Disappoints

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Impacted by lower mortgage banking revenues, Wells Fargo WFC recorded a negative earnings surprise of 3.6% in second-quarter 2018. Adjusted earnings of $1.08 per share missed the Zacks Consensus Estimate of $1.12. Results were in line with the prior-year quarter earnings.

Notably, results exclude net discrete income-tax expense of 10 cents per share. Including non-recurring items, net income came in at $5.2 billion or 98 cents per share compared with $5.9 billion or $1.08 per share reported in the prior-year quarter.

Lower provisions and higher net interest income aided results. However, reduced fee income was an undermining factor. Moreover, expenses soared. Further, reduction in loans and deposits acted as headwinds for the quarter.

The quarter’s total revenues came in at $21.6 billion, outpacing the Zacks Consensus Estimate of $21.5 billion. However, the reported figure compared unfavorably with the prior-year quarter tally of $22.2 billion.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues decreased 1.7%, Wholesale Banking revenues were down around 4%, and revenues in the Wealth and Investment Management unit dipped 4.8%.

Loans & Non-Interest Income Fall, Costs Escalate, NII Improves

Wells Fargo’s net interest income in the quarter came in at $12.5 billion, up 1% year over year. Increased interest income from debt securities, loans held for sale, mortgages held for sale, loans, equity securities, along with higher other interest income, were mostly offset by higher interest expense. Further, net interest margin expanded 3 basis points (bps) year over year to 2.93%.

Non-interest income at Wells Fargo came in at around $9 billion, down 8% 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 securities and higher other income.

As of Jun 30, 2018, total loans were $944.3 billion, down around 1.4% year over year. Reduction in consumer as well as commercial loan portfolio was recorded. Total deposits came in at $1.3 trillion, down 5% from the prior-year quarter.

Non-interest expense at Wells Fargo was around $14 billion, up 3% from the year-earlier quarter. This upsurge in expenses primarily stemmed from rise in salaries and commission, and incentive compensation, along with elevated other expenses. Notably, increased operating losses mainly related to non-litigation expense were on the downside. Nonetheless, Wells Fargo remains committed to achieve expense reduction of $4 billion by the end of 2019.

The company’s efficiency ratio of 64.9% came in above the 60.9% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality Improves

Wells Fargo’s credit quality metrics improved in the second quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $11.1 billion as of Jun 30, 2018, down 8.3% year over year.

Provision for credit losses was $452 million, descending 19% year over year. Net charge-offs were $602 million or 0.26% of average loans in the second quarter, down 8.1% from the year-ago quarter’s net charge-offs of $655 million (0.27%). Non-performing assets were down 18.4% to $8 billion in the quarter under review from $9.8 billion reported in the prior-year quarter.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. In the April-June quarter, the company returned $4 billion to shareholders through common stock dividends and net share repurchases.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $153 billion from $151.7 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 12% under Basel III (fully phased-in) as of Jun 30, 2018, compared with 11.6% recorded in the year-earlier quarter.

Book value per share advanced to $37.41 from $36.49 recorded in the comparable period last year.

Our Viewpoint

Top-line headwinds, aided by lower fee income, were perceived. Furthermore, flaring up expenses remained a major drag in the quarter, along with slowdown in the mortgage business. Nevertheless, improved credit quality reflecting lower provisions were positives.

Despite several legal tensions, Wells Fargo remains focused on maintaining its financial position. Last year, this banking giant doubled its cost-cutting targets to combat escalating expenses. Moreover, the company is working on strategic initiatives, which might help the company regain confidence of its clients and shareholders.

We believe, over the long term, investors will not be disappointed with their investment in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. We also anticipate strategic acquisitions and the bank’s efforts to address current adversities will help it expand its business and enhance profitability.

Wells Fargo & Company Price, Consensus and EPS Surprise

Wells Fargo & Company Price, Consensus and EPS Surprise | Wells Fargo & Company 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.

Competitive Landscape

Driven by top-line strength, Citigroup C delivered a positive earnings surprise of 5.2% in second-quarter 2018. Earnings from continuing operations per share of $1.62 for the quarter easily outpaced the Zacks Consensus Estimate of $1.54. Also, earnings were up 28% year over year.

Overall high revenues were reflected, driven by elevated banking, equity markets and consumer banking revenues, along with loan growth. Moreover, expenses remained stable. However, fixed income market revenues disappointed.

Among other major banks, Bank of America Corp. BAC is scheduled to report second-quarter results on Jul 16, while U.S. Bancorp USB will report on Jul 18.

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