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Will Mortgage Banking Aid Wells Fargo's (WFC) Q3 Earnings?

Zacks Equity Research

Wells Fargo WFC is scheduled to report third-quarter 2019 earnings, before the opening bell, on Oct 15.

This San Francisco-based banking giant has been embroiled in one scandal after another for more than three 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 have improved on rise in mortgage refinance volume owing to low interest rates in the third quarter. Further, seasonal pick-up is expected to bolster revenues.

In addition, management expects mortgage originations for the quarter to have been 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 have increased marginally.

Here are the other factors influencing Wells Fargo’s Q3 results:

Soft Loan Growth: Per the Fed’s latest data, rise in loans are likely to remain low on a sequential basis for the September-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. Also, trade-war concerns have hurt business sentiments across the industries, which will have an adverse impact on loan demand.

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 third quarter is predicted to impede growth in net interest income (NII) to an extent. Moreover, the central bank’s accommodative monetary-policy stance on interest rate and expected slowdown in global economy are likely to affect banks’ net interest margins.

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 will likely 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 might 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 do 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 +5.79%.

Zacks Rank: The company currently carries a Zacks Rank of 3, which increases the predictive power of ESP.

The Zacks Consensus Estimate for the soon-to-be-reported quarter’s earnings remained stable, over the last seven days and calls for a year-over-year rise of 5.3%. However, the Zacks Consensus Estimate for sales is projected at $20.9 billion, down 4.8% 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.

Citigroup C is slated to release results on Oct 15. The company has an Earnings ESP of +0.51% 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 Oct 17. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.72%.

The Earnings ESP for Huntington Bancshares Incorporated HBAN is +2.72% and it carries a Zacks Rank of 3, currently. The company is set to report quarterly numbers on Oct 24.

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