Wells Fargo (WFC) Q3 Earnings Beat Estimates, Revenues Up

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Driven by top-line growth, Wells Fargo & Company 's WFC earnings of $1.05 per share in third-quarter 2015 beat the Zacks Consensus Estimate by a penny. Moreover, results were above the year-ago quarter earnings of $1.02 per share.

Wells Fargo reflected organic growth aided by higher revenues along with strong loans and deposit balances. Moreover, a strong capital position and returns on assets and equity acted as the positives. However, higher non-interest expenses and provisions were a concern.

Notably, no reserve release was recorded in the quarter. Third-quarter net income applicable to common stock came in at $5.4 billion, up 1% year over year.

The quarter's total revenue came in at $21.9 billion, beating the Zacks Consensus Estimate of $21.5 billion. Moreover, revenues climbed around 3.3% on a year-over-year basis.

Furthermore, segment-wise, on a year-over-year basis, Community Banking and the Wealth, Brokerage and Retirement segments' total revenue jumped around 6.3% and 1.8%, respectively, while Wholesale Banking segment's revenue was down 1.8%.

Wells Fargo & Company - Earnings Surprise | FindTheBest

Performance in Detail

Wells Fargo's net interest income for the quarter came in at $11.5 billion, up 5% on a year-over-year basis. Increased interest income from trading assets and investment securities, along with lower deposits costs, aided the results. However, net interest margin decreased 10 basis points year over year to 2.96%.

Non-interest income at Wells Fargo came in at $10.4 billion, up 1% year over year, mainly due to elevated net gains from equity investments, higher lease and other income. These positives were mostly mitigated by reduced net gains from debt securities and net loss from trading activities.

As of Sep 30, 2015, total loans were $903.2 billion, increasing 7.7% on a year-over-year basis. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were $1.2 trillion, up 6.2% from the prior-year quarter.

Non-interest expense at Wells Fargo was $12.4 billion, up 1% from the prior-year quarter. The rise in expenses was primarily attributable to higher FDIC and other deposit assessments, commission and incentive compensation and salaries along with elevated other expenses. These were partially offset by lower core deposit and other intangibles and employee benefits.

The company's efficiency ratio of 56.7% was below 57.7% in the prior-year quarter and was within the targeted efficiency ratio range of 55%-59%. A fall in efficiency ratio indicates a rise in profitability. Wells Fargo hopes to operate at the high end of its targeted efficiency ratio range for the year 2015.

Credit Quality

Wells Fargo reported mixed credit quality metrics in the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $12.6 billion as of Sep 30, 2015, waning from $13.5 billion as of Sep 30, 2014.

Nonperforming assets fell 17.9% to $13.3 billion in the quarter from $16.2 billion in the prior-year quarter. However, provision for credit losses was $703 million, up 91% year over year from $368 million. Net charge-offs were $703 million or 0.31% of average loans in the reported quarter, up from the prior-year quarter net charge-offs of $668 million (0.32%).

Capital Position

Wells Fargo has maintained a solid capital position. The company purchased 51.7 million shares of its common stock in the third quarter.

Wells Fargo's Tier 1 common equity under Basel III (fully phased-in) increased to $141.9 billion from $139.9 billion in the prior quarter. The Tier 1 common equity to total risk-weighted assets ratio was 10.7% under Basel III (fully phased-in) as of Sep 30, 2015.

Book value per share increased to $33.69 from $31.55 in the prior-year quarter.

Other Developments

Recently, with an aim of increasing market share in commercial lending markets, Wells Fargo has signed an agreement with General Electric Company (GE) to buy its $30 billion business (roughly $32 billion in assets) in commercial lending and leasing.

Wells Fargo will also take over GE Capital Corporate Finance's portfolio of senior secured loans and leases for middle market companies across the United States and Canada, as well as an unspecified number of employees. The deal is expected to close in the first quarter of 2016. Other deal terms were not disclosed.

Our Viewpoint

Though Wells Fargo has reported decent revenue growth, 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. With the thrust of banking regulations, there will be pressure on fees and loan growth. Further, rise in expenses remains a concern.

Looking at the fundamentals, Wells Fargo's growth plans have historically included a large number of acquisitions, the Wachovia acquisition in December 2008 being the largest. Additionally, Wells Fargo announced consecutive dividend increases over the past few years with the latest hike of 7% being announced in April 2015.

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, prudent expense management as well as expected improvement in credit quality will support its profit figures. Additionally, the company's strong deployment activities raised investors' confidence.

JPMorgan Chase & Co. JPM , which kick-started third-quarter earnings season, missed the Zacks Consensus Estimate. The bank came up with adjusted earnings of $1.32 per share, delivering a negative surprise of 4.3%. The bottom line also declined 2.9% from the year-ago earnings of $1.36 per share. Weak trading activities primarily led to a decline in overall profit for JPMorgan this time around. Revenues from trading fixed income, currencies and commodities fell 23%to $2.93 billion.

Among other Wall Street giants, U.S. Bancorp USB and Citigroup Inc. C will report on Oct 15.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold).

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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.

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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