It has been about a month since the last earnings report for Wells Fargo & Company WFC. Shares have added nearly 8% in that time frame, outperforming the market.
Will the recent positive trend continue leading the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Wells Fargo's Q4 Earnings Beat, Expenses Flare Up
Driven by interest income, Wells Fargo’s fourth-quarter 2016 earnings recorded a positive surprise of about 3%. Adjusted earnings of $1.03 per share outpaced the Zacks Consensus Estimate by $0.03. Moreover, it compared favorably with the prior-year quarter’s earnings of $1.00 per share.
Including net hedge ineffectiveness accounting impact of $0.07, earnings came in at $0.96 per share.
For the year ended 2016, earnings per share were $3.99, down $0.13 compared with the prior year. Results also lagged the Zacks Consensus Estimate of $4.03.
Wells Fargo witnessed organic growth aided by strong loans and deposit balances, along with elevated interest income. Moreover, a solid capital position as well as returns on assets and equity acted as the key drivers. However, higher expenses and lower non-interest income were a concern.
Notably, reserve release of $100 million was recorded in the reported quarter, driven by improved residential real estate and stabilized oil and gas industry conditions. Fourth-quarter net income came in at $5.3 billion, down 5.4% year over year.
The quarter’s total revenue was $21.6 billion, lagging the Zacks Consensus Estimate of $22.4 billion. Revenues were in line on a year-over-year basis.
Revenues for the year ended 2016 were $88.3 billion, marking a year-over-year increase of 3%. However, revenues lagged the Zacks Consensus Estimate of $89.4 billion.
Further, on a year-over-year basis, revenue generation at the business segments was impressive. Wholesale Banking and Wealth and Investment Management segments’ total quarterly revenue climbed around 9.1% and 5.1%, respectively, while Community Banking revenues dipped 4.9%.
Loans and Deposits Increased, Costs Surged
Wells Fargo’s net interest income in the quarter came in at $12.4 billion, up 7% on a year-over-year basis. Increased interest income from trading assets and mortgages held for sale, along with higher other interest income drove results. However, net interest margin contracted 5 basis points year over year to 2.87%.
Non-interest income at Wells Fargo was $9.2 billion, down 8% year over year, mainly due to reduced insurance, mortgage banking revenue, lower net gains from debt securities and low net gains from equity investments. These negatives were partially mitigated by higher lease income.
As of Dec 31, 2016, total loans were $967.6 billion, increasing 5.6% year over year. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were $1.3 trillion, up 7% from the prior-year quarter.
Non-interest expense at Wells Fargo was $13.2 billion, up 5% from the year-ago quarter. The rise in expenses was primarily stemmed by higher FDIC and other deposit assessments as well as other elevated expenses.
The company’s efficiency ratio of 61.2% was above 58.4% recorded in the prior-year quarter and also exceeded the targeted efficiency ratio range of 55%–59%. A rise in efficiency ratio indicates a fall in profitability. Wells Fargo hopes efficiency ratio to remain elevated moving ahead.
Credit Quality: Cause of Concern?
Wells Fargo’s credit quality metrics was a mixed bag in the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $12.5 billion as of Dec 31, 2016, in line with the prior-year quarter.
Provision for credit losses was $805 million, down 3.1% year over year. Net charge-offs were $905 million or 0.37% of average loans in the reported quarter, up from the year-ago quarter net charge-offs of $831 million (0.36%). Non-performing assets were down 10.9% to $11.4 billion in the quarter under review from $12.8 billion in the prior-year quarter.
Strong Capital Position
Wells Fargo has maintained a sturdy capital position. In fourth-quarter 2016, the company repurchased 24.9 million shares of common stock and entered into a forward repurchase transaction of 14.7 million shares, which settled in Jan 2017.
Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $146.4 billion from $142.4 billion in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.7% under Basel III (fully phased-in) as of Dec 31, 2016, compared with 10.8% in the prior-year quarter.
Book value per share increased to $35.18 from $33.78 in the prior-year quarter.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There have been three upward revisions for the current quarter compared to two downward. While looking back an additional 30 days, we can see even more upward momentum. There have been four moves up in the last two months.
At this time, Wells Fargo & Company's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with a 'B'. Charting a somewhat similar path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregte VGM score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than value investors.
Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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Wells Fargo & Company (WFC): Free Stock Analysis Report
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