Wells Fargo & Company
) has achieved its twelfth consecutive quarter of growth in
earnings per share by reporting earnings of 92 cents per share in
fourth quarter 2012. Results improved from earnings per share of
88 cents in the prior quarter and 73 cents in the year-ago
quarter. Also, it beat the Zacks Consensus Estimate by 5 cents.
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For the year ended 2012, earnings per share were $3.36,
significantly up by 54 cents compared with the prior-year.
Results also outpaced the Zacks Consensus Estimate by 3 cents.
Fourth quarter net income applicable to common stock came in at
$4.9 billion, up 4.3% sequentially and 25.6% year over year. For
the year ended 2012, net income applicable to common stock stood
at $18 billion, up 19% year over year.
Results at Wells Fargo benefited from improvement in top line,
aided by rise in all segments' revenue. It also reported $250
million in reserve release (pre-tax), attributable to improved
portfolio performance. However, the company experienced rise in
The quarter's total revenue came in at $21.9 billion, beating the
Zacks Consensus Estimate of $21.3 billion. Revenues also advanced
3.3% sequentially and 6.3% year over year.
Revenues for the year ended 2012, came in at $86.1 billion, up
6.0% year over year. Also, it beat the Zacks Consensus Estimate
of $85.7 billion.
Furthermore, segment-wise, on a sequential basis, Community
Banking, Wholesale Banking and Wealth, Brokerage and Retirement
segments reported rise of 5.3%, 1.7% and 3.3%, respectively.
Performance in Detail
Wells Fargo's net interest income for the quarter came in at
$10.6 billion, down 0.9% sequentially. Net interest margin dipped
10 basis points sequentially to 3.56%. With the pressure of low
interest rate environment, income and margin were affected by
continuing repricing of the balance sheet, partially offset by
increased variable income.
Non-interest income at Wells Fargo came in at $11.3 billion, up
6.6% from the prior quarter. Higher equity gains, driven by
improved private equity businesses primarily led to the
augmentation in non interest income. Moreover, the rise was
supported by higher deposit service charges, trust and investment
fees and mortgage banking income.
As of December 31, 2012, total loans were $799.6 billion,
ascending 2.2% sequentially. Growth in credit card, mortgage, and
commercial and retail brokerage loan balances contributed to this
increase. However, it was partially offset by continued reduction
in the non-strategic/liquidating portfolio. Average core deposits
were $928.8 billion, up 15% (annualized) from the prior quarter.
Non-interest expense at Wells Fargo was $12.9 billion, up 6.6%
from the prior quarter. Higher operating losses and increased
salaries led to the rise in total expenses. These were partially
mitigated by lower advertising costs. Though the company's
efficiency ratio of 58.8% was above 57.1% reported in the prior
quarter, yet it remained within the targeted efficiency ratio
range of 55% to 59%.
Wells Fargo reported mixed credit quality trends in the quarter,
affected by the completion of the implementation of the Office of
the Comptroller of the Currency (OCC) guidance, issued in the
prior quarter. The guidance demanded write-down of performing
consumer loans restructured in bankruptcy to collateral value.
Wells Fargo's allowance for credit losses, including the
allowance for unfunded commitments, totaled $17.5 billion as of
December 31, 2012, waning from $17.8 billion as of September 30,
2012. Net charge-offs were $2.1 billion, or 1.05% of average
loans in the reported quarter, down from the prior quarter net
charge-offs of $2.4 billion (1.21%). Nonperforming assets dipped
to $24.5 billion in the quarter from $25.3 billion in the prior
However, provision for credit losses increased 12.5% sequentially
to $1.8 billion in the reported quarter.
Wells Fargo maintained a solid capital position. The company
purchased 42 million shares of common stock in the quarter.
Moreover, it opted for an additional estimated 6 million shares
through a forward repurchase transaction, which is expected to be
settled in the first quarter of 2013.
As a result, Wells Fargo's Tier 1 common equity under Basel I
increased $3.3 billion sequentially to $109.1 billion, with Tier
1 common equity to total risk-weighted assets ratio of 10.12%
under Basel I as of December 31, 2012. Moreover, its estimated
Tier 1 common equity ratio was 8.18% under the latest Basel III
The Tier 1 leverage ratio was 9.47% as of December 31, 2012, up
from 9.40% as of September 30, 2012. Tier 1 capital ratio was
11.75% as of December 31, 2012 compared with 11.50% as of
September 30, 2012. Book value per share improved to $27.64 from
$27.10 in the prior quarter and $24.64 in the prior-year quarter.
Earlier this week, Wells Fargo along with nine other mortgage
servicers announced settlement agreements with the Office of the
Comptroller of the Currency (OCC) and the Federal Reserve Board
(FRB) to close their Independent Foreclosure Review (IFR)
Wells Fargo's agreed to pay $766 million in cash. Therefore, the
company recorded a pre-tax charge of $644 million in fourth
quarter 2012 as full reserve for its cash payment part of the
settlement and additional remedial costs. The company has also
announced an additional $1.2 billion to foreclosure prevention.
The positive developments of the sector and gradually improving
macroeconomic elements helped the banking behemoth to keep up 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 addition in December 2008. Notably, in the
first half of 2012, the company completed three acquisitions with
combined total assets of $4.5 billion. Further, on August 1, the
company completed the acquisition of a prime brokerage and
technology provider with assets of approximately $280 million.
Also, it has announced consecutive dividend increases over the
past three years with the latest hike of 83.3% being announced in
Though there are concerns related to the impact of legal issues
and its exposure to the European economy, equity-centric
activities in the U.S. are expected to support Wells Fargo's
results in the upcoming quarters with continued recovery in the
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 enable 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 though at a slower pace, will support its profit
figures. Its stress test clearance and subsequent dividend hike
as well as its strategy to increase share buybacks also boost
Yet, we believe the top-line headwinds would persist, given the
protracted economic recovery. Plus, a low interest rate
environment would keep its 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 could remain feeble.
Among the two most important bankers to kick start the results,
Wells Fargo, with exposure in almost all banking businesses, is
the first, while
JPMorgan Chase & Company
) has delayed its earnings release this quarter. Wells Fargo's
release should be a significant indicator of performance in the
key banking sector.
Among other Wall Street big shots,
The Goldman Sachs Group Inc.
) will report on January 16, while
Bank of America Corporation
) on January 17.
Wells Fargo currently retains a Zacks Rank #3 (Hold). We believe
such strong results might lead to positive earnings estimate