Bank stocks have outperformed the broader S&P 500 Index in the third quarter, driven by rising interest rates. Among the group, Wells Fargo (WFC) stock has been a hot commodity, rising some 20% over the past six months, including 10% gains in thirty days. But can its strong run continue?
Wells Fargo is set to report third quarter fiscal 2021 earnings results before the opening bell Thursday. With the stock now up 58% year to date, besting the 17% rise in the S&P 500 index, the market appears more willing to look beyond the bank’s legacy issues and focusing on long-term sustainability. This is even though Wells Fargo was hit with a $250 million fine by the Office of the Comptroller of the Currency for failing to remediate past account issues in a fast enough manner.
Among other restrictions, the new penalties prohibit Wells Fargo from acquiring certain third-party residential mortgage servicing. It also requires that the bank ensure that borrowers aren't transferred out of the bank’s loan servicing portfolio until remediation is provided. In response, CEO Charlie Scharf said, "The OCC's actions today point to work we must continue to do to address significant longstanding deficiencies."
While there are still plenty of other challenges for Wells Fargo, including the fact that it has to balance much-needed cost cuts with revenue/business growth, the bank has demonstrated meaning operational improvements. Not only has Wells Fargo’s charge-offs and core provisioning improved over the past few quarters, metrics such as adjusted expenses are also trending in the right direction, helping to deliver beat on the bottom lines. On Thursday the bank’s results will answer the question as to whether a successful transition from regulatory remediation and turnaround to core growth is sustainable in the near term.
For the three months that ended September, analysts expect Wells Fargo to earn 99 cents per share on revenue of $18.4 billion. This compares to the year-ago quarter when earnings were 42 cents per share on revenue of $17.97 billion. For the full year, ending in December, earnings are projected to be $4.35 cents per share, up from 41 cents per share a year ago, while full-year revenue of $75.26 billion would rise 4% year over year.
Wells Fargo's projected full-year earnings growth of 960% from 41 cents a year ago to $4.35 per share is nothing short of remarkable. That impressive growth, however, has to do with the improvements the bank has made of the reduction in loan loss provisions. The Fed has noted that Wells Fargo’s loan losses are no longer as risky as they were are the start of the pandemic. Aside from meaningful improvements in charge-offs and core provisioning, Wells Fargo’s adjusted expenses are also trending in the right direction, helping to deliver beat on the bottom lines.
In the second quarter, not only did earnings top estimates by a significant amount, the company's double-digit revenue growth was also well ahead of expectations. The bank generated quarterly net income of over $6 billion, partly boosted by a $1.6 billion decrease in the allowance for credit losses. Wells Fargo also repurchased 35.3 million shares during the quarter, spending $1.6 billion. The bank also plans to spend some $18 billion buybacks in the next year, reducing the share count by 10% in the process.
These moves include plans to slash some $10 billion in expenses — whether via organizational structure optimization or branch rationalization. On Thursday investors will look to see whether Wells Fargo can build on its recent successes.
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