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Will Legal Hassles Impact Wells Fargo's (WFC) Q2 Earnings?

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Wells Fargo WFC is scheduled to report second-quarter earnings, before the opening bell on Jul 13.

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

The mortgage business of Wells Fargo is expected to have witnessed a slowdown in the second quarter. With the interest rates moving higher, refinancing activities and fresh originations have been slowing down. Therefore, no major help is expected from this segment. Thus, growth in Wells Fargo’s mortgage banking revenues will likely have remained low.

However, management expects residential mortgage originations to increase in the to-be-reported quarter, reflecting seasonality in the purchase market.

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

Loan Growth: Per the Fed’s latest data, loans are likely to have improved slightly on a sequential basis during the April-June quarter. Particularly, weakness in revolving home equity loans might have offset growth in commercial and industrial (C&I), consumer and overall real estate loans to some extent.

After declining for five consecutive quarters, auto originations have stabilized in the last two quarters. With the completion of the centralization of collection and funding activities, the bank is positioned to start increasing originations over time, and currently estimates the portfolio of balances to begin growing in early 2019.

Notably, based on the current pricing trends, management expects production margin to have declined further in second-quarter 2018.

Net Interest Income (NII) Growth: NII growth is expected to have been decent, given modest loan and deposit growth, and rising net interest margin on rising rates.

According to management, net interest income is predicted to be ‘relatively stable’ in 2018. It expects that lower earning assets and higher deposit costs might offset benefits from higher interest rates.

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, during the quarter under review. Moreover, ongoing litigation hassles are expected to have resulted in elevated legal costs. Encouragingly, seasonally higher personnel expenses are expected to have dropped in the quarter, though salary expense is likely to have flared up.

Non-Interest Revenues to Disappoint: Outflows from the asset-management business will likely have been recorded on market declines. Growth in trading revenues is predicted to have been muted as uncertainties, mainly related to the U.S.-China trade war and some other geo-political tensions were not enough to induce volatility. In addition, trust income is likely to disappoint on lower equity markets.

Why a Likely Positive Surprise?

Our proven model indicates that chances of Wells Fargo beating the Zacks Consensus Estimate are high as it has the right combination of the two key ingredients — positive Earnings ESP,and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold).

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

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at +0.33%. This is a very significant and leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: The combination of Wells Fargo’s Zacks Rank #3 and a positive ESP makes us confident of an earnings beat.

The Zacks Consensus Estimate for the to-be-reported quarter’s earnings remained unchanged over the last seven days, calling for year-over-year growth of 4.7%. However, the Zacks Consensus Estimate for sales is projected at $21.6 billion, down 2.7% year over year.
 

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and 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 +0.48% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for M&T Bank MTB is +0.28% and the stock carries a Zacks Rank of 2. The company is scheduled to release results on Jul 18.

SunTrust Banks, Inc. STI has an Earnings ESP of +0.45% and carries a Zacks Rank of 3. It is slated to report results on Jul 20.

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