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Will Wells Fargo (WFC) Disappoint this Earnings Season?

Wells Fargo & CompanyWFC is scheduled to report its third-quarter 2015 results before the opening bell on Wednesday, Oct 14. Too many questions linger in investors' minds this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.

In the last quarter, impacted by higher expenses and reduced mortgage banking income, Wells Fargo reported a negative earnings surprise of 0.96%. However, results were above the year-ago quarter earnings by 2%. Total loans and deposits rose. The company experienced a rise in non-interest expenses, reduction in non-interest income and higher provisions on a year-over-year basis.

Will Wells Fargo disappoint again with the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q3 Results

Global concerns such as slowdown in China and downward pressure on oil prices have remained concerns for the banking stocks. Energy lending, which once happened to aid the U.S. oil boom, now seems to give impact banks in the form of continuous regulatory pressure to limit exposure in the sector.

Concern arises on the fact that amid the still low oil prices, credit quality of the loans made to the energy companies will continue to deteriorate, which may ultimately hit profitability. This is because higher provisioning to cover the bad loans of the energy companies is likely to shrink the bank's overall earnings.

Further, interest rate spreads are unlikely to support the top line any time soon as the Fed intends to keep interest rates low for a considerable time. Efforts to strengthen the top line by focusing more on non-interest income have also not been working effectively.

Moreover, concerns over macroeconomic issues pulled investors out of the market, which led bond trading volumes to remain flat and is expected to result in overall trading revenues slump in the quarter.

Though industry-wide weakness in the key operating segments and regulatory matters are expected to hamper the results, continued expense control and balance sheet restoration should act as tailwinds in the quarter. Wells Fargo has implemented company-wide expense management initiatives. In addition, with the completion of the integration process and the continuance of the economic recovery, expenses are anticipated to decrease, thereby providing opportunities for future improvement in operating leverage. Notably, the company expects to maintain targeted efficiency ratio range of 55-59% in the fourth quarter.

Based on the current rate environment, the level of its application pipeline and the seasonal slowdown in the purchase market, Wells Fargo currently expects mortgage originations in the third quarter to be lower sequentially. Gain on sale ratio is expected to remain within the range of the past five quarters between 140 and 210 basis points.

Further, legal costs are now an integral part of Wells Fargo's financials. With increasing regulatory scrutiny on the business model, Wells Fargo is not expected to rid itself of such expenses, at least in the near term, though settlement efforts should take the burden off its shoulders.

Activities of Wells Fargo during the quarter were inadequate to win analysts' confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at $1.04 per share over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that Wells Fargo is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Wells Fargo is -0.96%. This is because the Most Accurate estimate of $1.03 is below the Zacks Consensus Estimate by a penny.

Zacks Rank: Though Wells Fargo's Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The PNC Financial Services Group, Inc. PNC has an earnings ESP of +1.12% and carries a Zacks Rank #3. It is scheduled to report its third-quarter results on Oct 14.

The earnings ESP for M&T Bank Corporation MTB is +2.02% and it carries a Zacks Rank #3. The company is expected to release its third-quarter results on Oct 16.

Capital One Financial Corporation COF has an earnings ESP of +0.52% and carries a Zacks Rank #3. It is expected to report its third-quarter results on Oct 22.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

PNC FINL SVC CP (PNC): Free Stock Analysis Report

CAPITAL ONE FIN (COF): Free Stock Analysis Report

M&T BANK CORP (MTB): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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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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