Wells Fargo (WFC) Q3 Earnings Beat on Strong Mortgage Banking

Aided by robust mortgage banking revenues, Wells Fargo WFC reported third-quarter 2020 adjusted earnings of 56 cents per share, beating the Zacks Consensus Estimate of 47 cents. Results, however, compare unfavorably with the prior-year quarter figure of 92 cents. Including certain adjustments, net income came in at $2.04 billion or 42 cents per share.

The stock depreciated more than 1% in pre-market trading, reflecting investors’ disappointment with the results. Notably, the full-day trading session will display a clearer picture.

Increased gains on trading activities also supported the bank. Moreover, the company reflects prudent expense management. Further, high loans and deposits balance display a strong capital position. However, reduced net interest income on lower rates negatively impacted the company’s results. Provisions also soared during the reported quarter.

The quarter’s total revenues came in at $18.9 billion, beating the Zacks Consensus Estimate of $17.96 billion. The revenue figure, however, comes in lower than the year-ago quarter’s $22 billion.

Furthermore, quarterly revenue generation at the business segments disappointed, on a year-over-year basis. The Community Banking segment’s total quarterly revenues slipped 4.5% and Wholesale Banking revenues were down 18.8%. Further, revenues in the Wealth and Investment Management unit fell 25.5%.

Net Interest and Fee Income Fall, Costs Stable

Wells Fargo’s net interest income in the third quarter came in at $9.4 billion, down 19% year on year. Lower interest income mainly resulted in this downside, partly offset by decreased interest expenses. Furthermore, net interest margin shrunk 53 basis points (bps) year over year to 2.13%.

Non-interest income at Wells Fargo came in at $9.5 billion, sliding 9% year over year, primarily on fall in card fees, lending-related fees, deposit-related fees, trust and investment fees, net gains on debt and equity securities along with other income. These declines were partly offset by higher revenues from net gains from trading activities and mortgage banking.

As of Sep 30, 2020, total loans were $920.1 billion, down 2% sequentially. Lower commercial loans were partly negated by higher consumer loans. Total deposits came in at $1.38 trillion, down 2% from the prior quarter.

Non-interest expense at Wells Fargo was $15.2 billion during the July-September quarter, almost flat year on year. Higher personnel, occupancy, leases, restructuring charges and other expenses were muted by lower operating losses, along with reduced advertising and promotion costs.

The company’s efficiency ratio of 80.7% came in above the 69.1% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality: A Concern?

Wells Fargo’s credit quality metrics were a mixed bag during the September-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $20.5 billion as of Sep 30, 2020, significantly up 93.4% year over year.

Net charge-offs were $683 million or 0.29% of average loans in the reported quarter, up 5.9% from the year-ago quarter’s net charge-offs of $645 million (0.27%). Non-performing assets increased 36.7% to $8.2 billion in the third quarter from the $6 billion reported in the year-earlier period. Notably, provision for credit losses was $751 million compared with the prior-year quarter’s $695 million.

Healthy Capital Position

Wells Fargo has maintained a sturdy capital position. Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $134.9 billion from the $144.7 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.4% under Basel III (fully phased-in) as of Sep 30, 2020, down from the year-earlier quarter’s 11.6%.

Book value per share declined to $38.99 from the $40.48 recorded in the comparable period last year.

Return on assets was 0.42%, down from the prior-year quarter’s 0.95%. Return on equity was 4.22%, down from the year-ago quarter’s 9%.

As of Sep 30, 2020, eligible external total loss absorbing capacity (TLAC) as a percentage of total risk-weighted assets was 25.8% compared with the minimum requirement of 22.0%

Our Viewpoint

Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. In addition, the company is working on strategic initiatives, which might help regain the confidence of its clients and shareholders.

Nevertheless, top-line headwinds, along with lower net interest and fee income woes, are expected to prevail amid the continued coronavirus crisis. Though the bank’s performance reflects prudent expense management and solid mortgage banking revenues, flaring up provisions is a concern.

Wells Fargo Company Price, Consensus and EPS Surprise

Wells Fargo  Company Price, Consensus and EPS Surprise

Wells Fargo Company price-consensus-eps-surprise-chart | Wells Fargo Company Quote

Currently, Wells Fargo carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Mega Banks

Citigroup C delivered an earnings surprise of 38.6% in third-quarter 2020 on robust market revenues. Earnings per share of $1.40 for the quarter handily outpaced the Zacks Consensus Estimate of $1.01. Results were, however, down significantly from the prior-year quarter.

Citigroup recorded higher revenues on investment banking and market revenues during the reported quarter. Notably, equity market revenues (up 15%) were impressive on strong performance in cash equities and derivatives, partially offset by lower prime finance revenues, while fixed income revenues (up 18%) were also on an upswing, reflecting strength in spread products and commodities.

Moreover, investment banking revenues (up 13%) increased on a solid underwriting business, partly muted by lower advisory business. However, consumer banking disappointed due to the continued impact of pandemic. Moreover, elevated cost of credit and elevated expenses were major drags.

Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s JPM third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35. Results included legal expenses of $524 million or 17 cents per share. Excluding these, earnings amounted to $3.09 per share.

During the quarter, the company reported net reserve releases, which led to lower credit costs. In a statement, the CEO Jamie Dimon said, “we maintained our credit reserves at $34 billion given significant economic uncertainty and a broad range of potential outcomes.”

Among others, Morgan Stanley MS will report earnings numbers on Oct 15.

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