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Will Mortgage Weakness Hurt Wells Fargo's (WFC) Q1 Earnings?

Zacks Equity Research

Wells Fargo WFC is scheduled to report first-quarter 2019 earnings, before the opening bell on Apr 12.

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. With the ongoing review process of business practices, more wrongdoings may be reported, consequently straining the bank’s top line.

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

Further, management expects mortgage originations for the quarter to be down due to seasonality in the purchase market, while production margin is estimated to be within the range of the last two quarters of 2018.

Here are the other factors influencing Wells Fargo’s Q1 results:

Soft Loan Growth: Per the Fed’s latest data, loans are likely to have improved slightly on a sequential basis during the Mar-end 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.

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

Net Interest Income (NII) Might Rise: A decent lending scenario during the first quarter is predicted to have aided growth in net interest income (NII). Also, the December 2018 rate hike will have a partial positive impact on the company’s net interest margin despite flattening of the yield curve and steadily increasing deposit betas.

Also, the Zacks Consensus Estimate for average interest earning assets of $1.74 trillion for the to-be-reported quarter indicates slight sequential increase. This, along with modest lending activities, is projected to have been conducive to 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. Moreover, ongoing litigation hassles are expected to have resulted in elevated legal costs in the quarter to be reported.

Non-Interest Revenues Might Escalate: Growth in trading revenues is predicted to have been 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 have been recorded on market gains. In addition, trust income is likely to reflect improvement on strong equity markets.

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

According to our quantitative model, chances of Wells Fargo beating the Zacks Consensus Estimate in the first quarter are low. This is because it 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 -0.73%.

Zacks Rank: It carries a Zacks Rank #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 remained unchanged over the last seven days, calling for a year-over-year decline of 3.6%. Additionally, the Zacks Consensus Estimate for sales is projected at $20.8 billion, down 5.1% year over year.

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and EPS Surprise | Wells Fargo & Company Quote

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 Apr 16. The company has an Earnings ESP of +0.52% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Bank of New York Mellon Corporation BK is scheduled to report earnings figures on Apr 17. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.17%.

The Earnings ESP for BankUnited, Inc. BKU is +1.89% and it carries a Zacks Rank of 3, currently. The company is set to report quarterly numbers on Apr 24.

Zacks' Top 10 Stocks for 2019

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