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Can Wells Fargo’s (WFC) Q4 Earnings Brave Mortgage Weakness?


Wells Fargo WFC is scheduled to report fourth quarter and 2018 earnings, before the opening bell on Jan 15.

Troubles kept mounting for the bank since the revelation of the sales scandal in 2016, which was followed by disclosure of issues in its auto insurance business, online bill pay services, wholesale banking unit and the Wealth and Investment Management segment. With the ongoing review process of business practices, more wrongdoings may be reported, consequently straining the top line.

However, during the to-be-reported quarter, Wells Fargo was able to enter into an agreement with attorneys general from about 50 states to settle the fake account scandal in which the firm's employees opened accounts for customers without their knowledge.

Here are the other factors influencing Wells Fargo’s fourth-quarter results:

Soft Loan Growth: Per the Fed’s latest data, loans are likely to show modest growth for the October-December quarter. Particularly, strong growth in commercial and industrial loans is expected to offset slowdown in commercial real estate and consumer loans to some extent.

Further, the Fed’s restrictions on Wells Fargo’s balance sheet growth due to past misconducts leave limited scope for loan growth.

Net Interest Income (NII) Might Rise: Modest loan growth during the quarter is likely to increase interest income.

The Zacks Consensus Estimate for average interest earning assets of $1.73 trillion for the fourth quarter indicates a decline of 2.6% year over year. However, support from expanding net interest margin on rising rates is projected to increase the company’s NII.

Mortgage Banking Income to Decline: The mortgage business of Wells Fargo is not expected to perform well in the fourth quarter. With the interest rates moving higher, refinancing activities and fresh originations have been declining. Therefore, no major help is expected from this segment.

Non-Interest Revenues to Disappoint: Outflows from the asset management business are expected due to market declines. Further, persistent trade-war tensions during the quarter kept trading activities muted, which is likely to weigh on the related fees. In addition, trust income might disappoint on lower equity markets.

Expenses Might Remain Stable: During the quarter, Wells Fargo divested several branches and announced a number of layoffs in a bid to cut costs. These efforts are likely to offset elevated legal costs.

Now, let’s have a look at what our quantitative model predicts:

According to our quantitative model, chances of Wells Fargo beating the Zacks Consensus Estimate in the fourth quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

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

Earnings ESP: The Earnings ESP for Wells Fargo is -3.19%.

Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings has been revised slightly downward over the past seven days. However, it reflects year-over-year growth of 21.7%. Notably, the consensus estimate for sales is $21.5 billion, down nearly 2.3%.

Stocks That Warrant a Look

Here are some 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.

E*TRADE Financial Corporation ETFC is scheduled to release results on Jan 24. It has an Earnings ESP of +0.96% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ares Capital Corporation ARCC is slated to release results on Feb 12. It has an Earnings ESP of +1.38% and carries a Zacks Rank #2.

Macro Bank Inc. BMA has an Earnings ESP of +2.17% and sports a Zacks Rank of 1. The company is also slated to release results on Feb 18.

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