Driven by prudent expense management,
Wells Fargo & Company
) earned $1.01 per share in second-quarter 2014, thereby surpassing
98 cents earned in the year-ago quarter. However, the reported
figure was in line with the Zacks Consensus Estimate.
Despite positive market sentiment, shares of Wells Fargo fell more
than 1% in the pre-market session, indicating that investors have
been bearish on the results. The price reaction during the trading
session will give a better sense about the extent of disappointment
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.
Second-quarter net income applicable to common stock came in at
$5.4 billion, up 3% year over year.
The quarter's total revenue came in at $21.1 billion, outpacing the
Zacks Consensus Estimate of $20.7 billion. However, revenues
declined 1.4% year over year.
Furthermore, segment-wise, on a year-over-year basis, Community
Banking and Wholesale Banking segments' total revenue fell 2.3% and
3.3%, respectively, while the Wealth, Brokerage and Retirement
segment reported a rise of 9.1%.
Performance in Detail
Wells Fargo's net interest income for the quarter came in at $10.8
billion, up slightly on a year-over-year basis. Increased interest
income from trading assets and investment securities, along with
lower funding costs, aided the results. However, net interest
margin decreased 32 basis points year over year to 3.15%.
Non-interest income at Wells Fargo came in at $10.3 billion, down
3% year over year, mainly due to a fall in mortgage banking
revenues and reduced lease income along with lower insurance
revenues. These negatives were partially mitigated by increases in
net gains on debt securities, equity investments and trading
activities, higher card fees as well as trust and investment fees.
As of Jun 30, 2014, total loans were $828.9 billion, increasing
3.6% 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 $12.2 billion, down around
1% from the prior-year quarter. The fall in expenses was primarily
attributable to reduction in commission and incentive compensation,
core deposit and other intangibles as well as FDIC and other
deposit assessments, partially offset by higher salaries, employee
benefits and other expenses.
The company's efficiency ratio of 57.9% came in above 57.3% in the
prior-year quarter but was within the targeted efficiency ratio
range of 55%-59%. A rise in efficiency ratio indicates a fall in
profitability. Wells Fargo hopes to maintain its targeted
efficiency ratio range in the third quarter of 2014.
Wells Fargo reported improved credit quality metrics in the
quarter. Allowance for credit losses, including the allowance for
unfunded commitments, totaled $13.8 billion as of Jun 30, 2014,
waning from $16.6 billion as of Jun 30, 2013.
Net charge-offs were $717 million or 0.35% of average loans in the
reported quarter, down from the prior-year quarter net charge-offs
of $1.2 billion (0.58%). Nonperforming assets fell 14.2% to $18.1
billion in the quarter from $21.1 billion in the prior-year
quarter. Moreover, provision for credit losses were $217 million
against $652 million in the prior-year quarter.
Wells Fargo has maintained a solid capital position. The company
purchased 39.4 million shares of its common stock in the second
quarter. The company also entered into a forward repurchases
transaction for an additional estimated 19.4 million shares, which
is anticipated to settle in third-quarter 2014.
Wells Fargo's Tier 1 common equity under Basel III (General
Approach) increased to $134.8 billion from $132.7 billion in the
prior quarter. The Tier 1 common equity to total risk-weighted
assets ratio was 11.31% under Basel III (General Approach) as of
Jun 30, 2014.
The company's estimated Tier 1 common equity ratio was an estimated
10.09% under Basel III (Advanced Approach). The Tier 1 leverage
ratio was 9.86% as of Jun 30, 2014, up from 9.63% as of Jun 30,
Tier 1 capital ratio was 12.73% as of Jun 30, 2014 compared with
12.12% as of Jun 30, 2013. Book value per share increased to $31.18
from $28.26 in the prior-year quarter.
The positive developments of the sector and a gradually improving
macro economy helped the banking behemoth to post impressive
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 17% being announced in Apr 2014.
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. Moreover, higher legal costs could drive down
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 strong deployment activities raised investors'
Wells Fargo, with exposure in almost all banking businesses, is the
first among the banking majors to report second-quarter earnings.
The earnings release of this banking major should be an indicator
of the performance of the key banking sector.
Among other Wall Street giants,
) is slated to report earnings results on Jul 14,
JPMorgan Chase & Co.
) on Jul 15 and
Bank of America Corporation
) will report on Jul 16.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold).
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