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Wells Fargo (WFC) Misses on Q3 Earnings, Shows Cost Control


Impacted by lower mortgage banking revenues, Wells Fargo WFC recorded a negative earnings surprise of 3.4% in third-quarter 2018. Earnings of $1.13 per share missed the Zacks Consensus Estimate of $1.17. However, the bottom-line compared favorably with 83 cents recorded in the prior-year quarter.

Including non-recurring items, net income for the quarter came in at $6 billion compared with $4.5 billion reported a year ago.

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

The quarter’s total revenues came in at $21.9 billion, in line with the Zacks Consensus Estimate. Also, the reported figure compared favorably with the prior-year quarter tally of $21.8 billion.

On a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues increased 2.6%, Wholesale Banking revenues were down 2.7% and revenues in the Wealth and Investment Management unit dipped nearly 1%.

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

Wells Fargo’s net interest income (NII) in the third quarter came in at $12.6 billion, up 1% year over year. Increased interest income from debt securities, 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 8 basis points year over year to 2.94%.

Non-interest income at Wells Fargo came in at $9.4 billion, down marginally 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 trading activities and equity securities.

As of Sep 30, 2018, total loans were $942.3 billion, down around 1% year over year. This was contributed by reduction in consumer loans, partly offset by higher commercial loans. Total deposits came in at $1.3 trillion, down 3.1% from the prior-year quarter.

Non-interest expense at Wells Fargo was around $13.8 billion, down 4% from the year-earlier quarter. This decline in costs primarily stemmed from fall in commission and incentive compensation, along with lower other expenses. Notably, decreased operating losses mainly related to non-litigation expense was on the upside.

The company’s efficiency ratio of 62.7% came in below 65.7% recorded in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.

Credit Quality Improves

Wells Fargo’s credit quality metrics improved in the third quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $11 billion as of Sep 30, 2018, down 9.5% year over year.

Provision for credit losses was $580 million, falling 19%. Net charge-offs were $680 million or 0.29% of average loans in the third quarter, down 5.2% from the year-ago quarter’s net charge-offs of $717 million (0.30%). Non-performing assets were down 18.8% to $7.6 billion in the from $9.3 billion reported a year ago.

Capital Position

Wells Fargo has maintained a sturdy capital position. In the July-September quarter, the company returned $8.9 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 $148.8 billion from $152.6 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.9% under Basel III (fully phased-in) as of Sep 30, 2018, compared with 11.8% recorded in the year-earlier quarter.

Book value per share advanced to $37.55 from $36.92 recorded in the comparable period last year.

Our Viewpoint

Top-line headwinds, aided by lower fee income were perceived. Furthermore, higher expenses remained a major drag in the quarter, along with slowdown in the mortgage business. Nevertheless, improved credit quality reflecting lower provisions were the 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 it regain confidence of clients and shareholders.

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

Wells Fargo & Company Price, Consensus and EPS Surprise

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.

Among other major banks, Bank of America Corp. BAC is scheduled to report third-quarter results on Oct 15, while U.S. Bancorp USB will report on Oct 17. Comerica CMA will be releasing results on Oct 16.

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