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Improved Mortgage Banking to Aid Wells Fargo (WFC) Q2 Earnings

Zacks Equity Research

Wells Fargo WFC is scheduled to report second-quarter 2019 earnings, before the opening bell, on Jul 16.

This San Francisco-based banking giant has been embroiled in one scandal after another for more than two years. Troubles have been mounting at Wells Fargo since the revelation of the sales scandal in 2016, which was followed by disclosure of issues in its auto insurance business, online bill pay services, and the Wealth and Investment Management segment as well. With the ongoing review process of business practices, more wrongdoings may be reported, consequently straining the bank’s top line.

Wells Fargo’s mortgage banking revenues are likely to propel higher on rise in mortgage refinance volume owing to low interest rates in the second quarter. Further, seasonal pick-up is expected to bolster revenues.

In addition, management expects mortgage originations for the quarter to be up due to seasonality for home buying, along with some additional refinance activity which resulted from the decrease in mortgage interest rates. Production margin will likely be within the range of the last two quarters.

Here are the other factors influencing Wells Fargo’s Q2 results:

Soft Loan Growth: Per the Fed’s latest data, rise in loans are likely to remain low on a sequential basis for the June-end quarter. Particularly, weakness in revolving home equity loans, commercial and industrial (C&I), and commercial real estate loans might offset growth in consumer loans.

Furthermore, the Fed’s restrictions on Wells Fargo’s balance-sheet growth due to past misconducts limit scope for loan growth.

Net Interest Income (NII) Might Disappoint: A soft lending scenario during the second quarter is predicted to impact growth in net interest income (NII) to an extent. Moreover, the company’s net interest margin is expected to be affected due to the yield-curve flattening and steadily rising deposit betas.

Also, the Zacks Consensus Estimate for average interest earning assets of $1.73 trillion for the to-be-reported quarter indicates a sequential decrease marginally. This, along with modest lending activities, is anticipated to dampen the company’s NII growth in the quarter.

Expenses May Trend Higher: Wells Fargo might have recorded escalated costs, given its franchise investments in areas, including mobile banking technology, digital lending and brokerage offerings. Additionally, ongoing litigation hassles might result in elevated legal costs in the quarter to be reported.

Non-Interest Revenues May Escalate: Growth in trading revenues is predicted to be muted as lingering uncertainties, mainly related to the U.S.-China trade war, and some other geo-political tensions were insufficient to induce volatility. However, inflows from the asset-management business will likely be recorded on market gains. In addition, trust income is estimated to reflect improvement on strong equity markets.

Now, let’s have a look at what our quantitative model predicts:

Our proven model shows that Wells Fargo does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 3, which increases the predictive power of ESP. But we need to have positive earnings ESP to be sure of earnings beat.

The Zacks Consensus Estimate for the soon-to-be-reported quarter’s earnings moved 1.7% north, over the last seven days, calling for a year-over-year rise of 8.3%. However, the Zacks Consensus Estimate for sales is projected at $21 billion, down 2.6% year over year.

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company price-eps-surprise | Wells Fargo & Company Quote


Other Stocks That Warrant a Look

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

Comerica CMA is slated to release results on Jul 17. The company has an Earnings ESP of +0.81% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation MTB is scheduled to report earnings figures on Jul 18. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.20%.

The Earnings ESP for SunTrust Banks, Inc. STI is +0.93% and it carries a Zacks Rank of 3, currently. The company is set to report quarterly numbers on Jul 18.

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