Driven by prudent expense management,
Wells Fargo & Company
) earned $1.05 per share in first-quarter 2014, thereby achieving
earnings growth for the 17th consecutive quarter. Results
improved from $1.00 earned in the prior quarter and 92 cents in
the year-ago quarter. The reported figure also beat the Zacks
Consensus Estimate by 8 cents.
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Despite negative market sentiment, shares of Wells Fargo
increased marginally in the pre-market session, indicating that
investors have been bullish on the results. The price reaction
during the trading session will give a fair idea whether Wells
Fargo has been able to meet market expectations.
Total loans and deposits grew and the company recorded reduction
in non-interest expenses. Moreover, a strong capital position and
returns on assets and equity acted as the positives.
Wells Fargo also reported $500 million in reserve release
(pre-tax), attributable to its improved credit performance.
However, the company experienced a fall in its top line owing to
lower non-interest income.
First-quarter net income applicable to common stock came in at
$5.6 billion, up 14% year over year.
The quarter's total revenue came in at $20.6 billion, outpacing
the Zacks Consensus Estimate of $20.5 billion. However, revenues
declined 3.3% year over year.
Furthermore, segment-wise, on a year-over-year basis, Community
Banking and Wholesale Banking segments' total revenue fell 2.3%
and 8.2%, respectively, while the Wealth, Brokerage and
Retirement segment reported a rise of 9.4%.
Performance in Detail
Wells Fargo's net interest income for the quarter came in at
$10.6 billion, up 1% year over year. Increased interest income
from trading assets and investment securities, along with lower
funding costs, aided the results. However, net interest margin
decreased 29 basis points year over year to 3.20%.
Non-interest income at Wells Fargo came in at $10.0 billion, down
7% on a year-over-year basis, mainly due to a fall in mortgage
banking revenues and reduced net gains from trading activities
along with lower other income. These negatives were partially
mitigated by increases in net gains on debt securities and equity
investments, card fees as well as trust and investment fees.
As of Mar 31, 2014, total loans were $826.4 billion, increasing
3.3% on a year-over-year basis. Growth in commercial and
industrial, auto, foreign and commercial real estate mortgage
portfolio contributed to the rise. Average total deposits were
$1.1 trillion, up 9% from the prior-year quarter. Strong
commercial and consumer growth aided the positive results.
Non-interest expense at Wells Fargo was $11.9 billion, down 4%
from the prior-year quarter. The fall in expenses was primarily
attributable to reduction in employee benefits, core deposit and
other intangibles, FDIC and other deposit assessments as well as
commission incentive compensation and other expenses.
The company's efficiency ratio of 57.9% came in below 58.3% in
the prior-year quarter and was within the targeted efficiency
ratio range of 55%-59%. A fall in efficiency ratio indicates rise
in profitability. Wells Fargo hopes to maintain its targeted
efficiency ratio range in the second quarter of 2014.
Wells Fargo reported improved credit quality metrics in the
quarter. Allowance for credit losses, including the allowance for
unfunded commitments, totaled $14.4 billion as of Mar 31, 2014,
waning from $17.2 billion as of Mar 31, 2013.
Net charge-offs were $825 million or 0.41% of average loans in
the reported quarter, down from the prior-year quarter net
charge-offs of $1.4 billion (0.72%). Nonperforming assets fell
17.9% to $18.8 billion in the quarter from $22.9 billion in the
prior-year quarter. Moreover, provision for credit losses were
$325 million against $1.2 billion in the prior-year quarter.
Wells Fargo has maintained a solid capital position. The company
purchased 33.5 million shares of its common stock in the first
Further, during the quarter, the company received the Fed's
approval for its 2014 Capital Plan under the Comprehensive
Capital Analysis and Review (CCAR).
The capital plan for the company included a dividend hike of
16.7% to 35 cents per share for second-quarter 2014, subject to
the board's approval along with an increase in common stock
repurchase activity compared with 2013. Notably, Wells Fargo's
board of directors approved an additional repurchase of 350
Wells Fargo's Tier 1 common equity under Basel III (General
Approach) increased to $132.7 billion. The Tier 1 common equity
to total risk-weighted assets ratio was 11.36% under Basel III
(General Approach) as of Mar 31, 2014.
The company's estimated Tier 1 common equity ratio was an
estimated 10.04% under Basel III (Advanced Approach). The Tier 1
leverage ratio was 9.83% as of Mar 31, 2014, up from 9.53% as of
Mar 31, 2013.
Tier 1 capital ratio was 12.63% as of Mar 31, 2014 compared with
11.80% as of Mar 31, 2013. Book value per share increased to
$30.48 from $28.27 in the prior-year quarter.
The positive developments of the sector and a gradually improving
macro economy helped the banking behemoth to maintain its
impressive track record.
Looking at the fundamentals, Wells Fargo's growth plans have
historically included a large number of acquisitions, the
Wachovia acquisition in Dec 2008 being the largest. Additionally,
Wells Fargo announced consecutive dividend increases over the
past few years with the latest hike of 20% being announced in Apr
Nevertheless, we expect top-line headwinds to persist, given the
protracted economic recovery. Moreover, a low interest rate
environment would keep Wells Fargo's margins under pressure.
Further, lower mortgage banking revenues remain a concern. With
the thrust of banking regulations, there will be pressure on fees
and loan growth.
We believe that in 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. Going forward, we believe that
strategic acquisitions will help the company to expand its
business and boost profitability.
In our view, long-term investors who can absorb risks related to
economic and regulatory fluctuations can expect decent earnings
growth for Wells Fargo in the future. Solid capital levels,
disciplined expense management as well as expected improvement in
credit quality will support its profit figures.
Additionally, the company's stress test clearance in March and
the subsequent expected dividend hike, along with its strategy to
increase share buybacks raised investors' confidence.
Wells Fargo and
JPMorgan Chase & Co.
), with exposure in almost all banking businesses, are the first
among the banking majors to report first-quarter earnings. The
earnings releases of these banks should be an indicator of the
performance of the key banking sector.
) is slated to report earnings results on Apr 14 while
Bank of America Corporation
) will report on Apr 16.
Currently, Wells Fargo carries a Zacks Rank #2 (Buy).