Wells Fargo & Company
) earned 99 cents in third-quarter 2013, achieving the fifteenth
consecutive quarter of earnings per share growth. Results
improved from 98 cents earned in the prior quarter and 88 cents
in the year-ago quarter. Also, the results beat the Zacks
Consensus Estimate by 2 cents.
Total loans and deposits grew amid economic challenges and
disciplined expense management. Moreover, a strong capital
position and returns on assets and equity acted as positives.
Wells Fargo also reported $900 million in reserve release
(pre-tax), attributable to improved credit performance. However,
the company experienced a fall in top line due to reduced
Third-quarter net income applicable to common stock came in at
$5.6 billion, up 1.8% sequentially and 14.3% year over year.
The quarter's total revenue came in at $20.5 billion, lagging the
Zacks Consensus Estimate of $20.9 billion. Revenues also declined
4.2% sequentially and 3.3% year over year.
Furthermore, segment-wise, on a sequential basis, Community
Banking and Wholesale Banking segments fell 5.4% and 3.3% in
total revenue, respectively, while the Wealth, Brokerage and
Retirement segment reported a rise of 1.2%.
Performance in Detail
Wells Fargo's net interest income for the quarter came in at
$10.7 billion, almost in line with the prior quarter. Increased
interest income from the available for sale (AFS) securities
portfolio, lower funding costs, organic growth in commercial and
consumer loans, commercial real estate loan acquisitions, and one
additional business day in the quarter aided the results.
However, these positives were offset by reduced interest income
from mortgages held for sale and lower income from variable
sources. Further, net interest margin decreased 8 basis points
sequentially to 3.38%.
Non-interest income at Wells Fargo came in at $9.7 billion, down
8.5% on a sequential basis, mainly due to reduced mortgage
refinance volume and lower gain on sales margins. Moreover, trust
and investment fees also declined. These negatives were partially
compensated by elevated debt and equity gains, mortgage banking
servicing income and trading revenues.
As of Sep 30, 2013, total loans were $812.3 billion, ascending
1.3% on a sequential basis. Growth in commercial and industrial,
auto, foreign, credit card and commercial real estate mortgage
portfolio contributed to the rise. However, it was partially
offset by continued reduction in the non-strategic/liquidating
portfolio. Average total deposits were $1.0 trillion, up 6%
(annualized) from the prior quarter.
Non-interest expense at Wells Fargo was $12.1 billion, down 1.6%
from the prior quarter. The fall in expenses was primarily
attributable to lower incentive compensation.
The company's efficiency ratio of 59.1% was above 57.3% in the
prior quarter, and slightly outpaced the targeted efficiency
ratio range of 55-59%. Wells Fargo anticipates expenses to
decline sequentially in the fourth quarter of 2013, which will
help in maintaining the target efficiency range.
Wells Fargo reported improved credit quality metrics in the
quarter. Allowance for credit losses, including the allowance for
unfunded commitments, totaled $15.6 billion as of Sep 30, 2013,
waning from $16.6 billion as of Jun 30, 2013.
Net charge-offs were $975 million, or 0.48% of average loans in
the reported quarter, down from the prior-quarter net charge-offs
of $1.2 billion (0.58%). Nonperforming assets dipped to $20.7
billion in the quarter from $21.1 billion in the prior quarter.
Moreover, provision for credit losses decreased 88.5%
sequentially to $75 million in the reported quarter.
Wells Fargo has maintained a solid capital position. The company
purchased 50.9 million shares of its common stock in the quarter.
Moreover, an additional purchase of estimated 9.8 million shares
was conducted through a forward repurchase transaction,
anticipated to be settled in fourth-quarter 2013.
Wells Fargo's Tier 1 common equity under Basel I increased $2.7
billion sequentially to $120.3 billion. The Tier 1 common equity
to total risk-weighted assets ratio was 10.64% under Basel I as
of Sep 30, 2013 compared with 10.71% in the prior quarter.
The company's estimated Tier 1 common equity ratio was an
estimated 9.54% under the latest Basel III capital proposals,
compared with 8.54% in the prior quarter. The Tier 1 leverage
ratio was 9.76% as of Sep 30, 2013, up from 9.63% as of Jun 30,
Tier 1 capital ratio was 12.15% as of Sep 30, 2013 compared with
12.12% as of Jun 30, 2013. Book value per share increased to
$28.98 from $28.26 in the prior quarter and $27.10 in the
The positive developments of the sector and gradually improving
macroeconomic elements helped the banking behemoth to maintain
its illustrious track record.
On the fundamental side, Wells Fargo's growth plans have
historically included a large number of acquisitions, Wachovia
being the largest in Dec 2008. Notably, last year, the company
completed three acquisitions with combined total assets of $4.5
Also, it announced consecutive dividend increases over the past
few years with the latest hike of 20% being announced in Apr
Though there are concerns related to the impact of legal issues,
equity-centric activities in the U.S. are expected to support
Wells Fargo's results in the upcoming quarters with continued
recovery in the capital markets.
We believe that over the long term, investors should not be
disappointed with their investments in Wells Fargo, given its
diverse geographic and business mix, which enables it to sustain
consistent earnings growth. Going forward, we believe that
strategic acquisitions will help Wells Fargo expand its business
and improve its profitability.
We believe that long-term investors who can absorb the risks
related to economy and regulations can expect decent growth in
Wells Fargo's earnings in the future. Solid capital levels,
prudent expense management as well as expected improvement in
credit quality, will support its profit figures. Its stress test
clearance in March and the subsequent dividend hike as well as
its strategy to increase share buyback also lifted investors'
Yet, we believe the top-line headwinds would persist, given the
protracted economic recovery. Plus, a low interest-rate
environment would keep Wells Fargo's margins under pressure.
Wells Fargo's unrelenting legacy mortgage issues also remain a
concern. With the thrust of banking regulations, there will be
pressure on fees and loan growth.
Wells Fargo and
JPMorgan Chase & Co.
), with exposure in almost all banking businesses, are the first
among the banking big shots to report third-quarter earnings.
Their earnings releases should be a significant indicator of the
performance of the key banking sector.
Among other Wall Street big shots,
) will report on Oct 15 and
Goldman Sachs Group, Inc.
) on Oct 17.
Wells Fargo currently carries a Zacks Rank #3 (Hold).
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