Wells Fargo (WFC) Q1 Earnings Beat, Fee Income Disappoints

Driven by prudent expense management, Wells Fargo WFC recorded a positive earnings surprise of 11.1% in first-quarter 2019. Earnings of $1.20 per share surpassed the Zacks Consensus Estimate of $1.08. Results also came in above the prior-year quarter adjusted earnings of $1.12.

Higher net interest income and fall in expenses aided the company’s performance. However, reduced fee income was an undermining factor. Moreover, provisions soared. Further, reduction in loans and deposits acted as headwinds.

Net income came in at $5.5 billion compared with $4.7 billion in the prior-year quarter.

The quarter’s total revenues came in at $21.6 billion, outpacing the Zacks Consensus Estimate of $20.9 billion. However, the reported figure compares unfavorably with the prior-year quarter’s tally of $21.9 billion.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues edged down around 1%, Wholesale Banking revenues were down around 2.7%, and revenues in the Wealth and Investment Management unit dipped 2.4%.

Loans & Fee Income Fall, Costs Down, NII Improves

Wells Fargo’s net interest income in the quarter came in at $12.3 billion, up 1% year over year. Increased interest income from debt securities, loans along with higher other interest income, were mostly offset by higher interest expense. Furthermore, net interest margin expanded 7 basis points (bps) year over year to 2.91%.

Non-interest income at Wells Fargo came in at around $9.3 billion, down 4% year over year, primarily due to fall in almost all components of income, including mortgage banking and insurance income. This was partly offset by net gains from equity and trading securities, along with higher card fees.

As of Mar 31, 2019, total loans were $948.2 billion, down around 0.5% sequentially. Reduction in consumer as well as commercial loan portfolio was recorded. Total deposits came in at $1.3 trillion, down 1.6% from the prior quarter.

Non-interest expense at Wells Fargo was around $13.9 billion, down 7% from the year-earlier quarter. This decline in expenses primarily resulted from lower core deposit and other intangibles, FDIC and other deposit assessments and other expenses. These were partly offset by rise in salaries and commission, and incentive compensation, along with elevated employee benefits and equipment costs. Wells Fargo remains committed to achieve expense reduction of $4 billion by the end of 2019.

The company’s efficiency ratio of 64.4% came in below the 68.6% recorded in the year-ago quarter. A fall in efficiency ratio indicates a rise in profitability.

Credit Quality Improves

Wells Fargo’s credit quality metrics improved in the Mar-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.8 billion as of Mar 31, 2019, down 4.4% year over year.

Net charge-offs were $695 million or 0.30% of average loans in the reported quarter, down 6.2% from the year-ago quarter’s net charge-offs of $741 million (0.32%). Non-performing assets went down 7.6% to $7.3 billion, in the quarter under review, from $7.9 billion reported in the prior-year quarter. Notably, provision for credit losses was $845 million, significantly higher due to reserve build.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. In the Jan-Mar quarter, the company returned $6 billion to shareholders through common stock dividends and net share repurchases.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $148 billion from $152.3 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.9% under Basel III (fully phased-in) as of Mar 31, 2019, in line with the year-earlier quarter.

Book value per share advanced to $39.01 from $37.17 recorded in the comparable period last year.

Our Viewpoint

Top-line headwinds, along with lower fee income woes, are expected to prevail. Furthermore, flaring up provisions remains a drag, along with slowdown in the mortgage business. Nevertheless, lower expenses reflect prudent expense management.

Despite several legal tensions, Wells Fargo remains focused on maintaining its financial position. This banking giant is on track with its cost-cutting targets. Moreover, the company is working on strategic initiatives, which might help regain the confidence of its clients and shareholders.

We believe, over 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. We also anticipate strategic acquisitions and the bank’s efforts to address current adversities will help it expand its business and enhance profitability.

Wells Fargo & Company Price, Consensus and EPS Surprise

Wells Fargo & Company Price, Consensus and EPS Surprise | Wells Fargo & Company Quote

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other major banks, Bank of America Corporation BAC is scheduled to report first-quarter results on Apr 16, while U.S. Bancorp USB will report on Apr 17 and Citigroup C on Apr 15.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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