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Wells Fargo Reports Strong 3rd Quarter Earnings

- By James Li

During the third quarter, Wells Fargo & Co. (WFC) reported $5.6 billion in net income and diluted earnings per share of $1.03. These values represent a 2% increase and a 1% increase from second quarter values, respectively. Even though the company suffered over $185 million due to the customer account scandal, Wells Fargo increased their revenues by 2% from third quarter 2015.


Brief summary of earnings report

As mentioned in the Oct. 14 current report filing with the Securities and Exchange Commission, Wells Fargo issued a press release for its third-quarter operations and financial condition. The diversified financial services company maintained a strong financial outlook: the company had 1.17% return on assets and 11.6% return on equity. Additionally, the company had strong growth in loans and deposits, solid credit quality and high capital levels.

Chief financial officer John Shrewsberry discussed the company's strong third quarter results, which reflects the company's "diversified business model, strong balance sheet and improved credit performance." Net interest margin, one of the main contributors to higher revenues, increased $219 million from the second quarter. Mortgage banking noninterest income also slightly increased.

Material transactions and management changes

Wells Fargo agreed to the Consumer Financial Protection Bureau and other regulatory agencies regarding sham accounts from its retail customers. The management has settled the $190 million remediation with the Bureau and fully accrued the amount as of June 30. Additionally, the company agreed to several reforms, including the elimination of product sales goals for retail banking members, effective Oct. 1, confirmation emails and acknowledge letters to customers one hour after opening an account, account reviews for all retail and small business deposit customers, and expansion of customer account reviews to 2009. Additionally, the board of directors retained the Sherman & Sterling law firm and CEO John Stumpf forfeited over $41 million in unvested equity awards.

Stumpf retired as Wells Fargo CEO on Oct. 12 after 34 years of service. Tim Sloan, president and previous chief operating officer, succeeded Stumpf as CEO while Stephen Sanger took over as the chairman. The new CEO promises to "restore the trust of all stakeholders" of Wells Fargo during his tenure and build a stronger foundation for the future.

Company has good financial outlook

As implied in the earnings report, Wells Fargo's management strives to increase shareholder value quarter over quarter. The diversified financial services company has a profitability rank of 6 despite a modest financial strength rank of 5. While the company has good interest coverage, Wells Fargo has a poor Piotroski F-score of 3. The company's return on invested capital barely outperforms its WACC.

Wells Fargo has five good signs, including expanding operating margins and valuation ratios near three-year lows. The company's operating margin and net margin are near a 10-year high, and the former outperforms 67% of global banks. Among the top U.S. banks, including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Citigroup Inc. (NYSE:C), Wells Fargo has the highest operating margin, return on equity and return on assets. Wells Fargo has a slightly lower net margin than does Chase.

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Warren Buffett (Trades, Portfolio) owns 479.7 million shares of Wells Fargo, representing 9.51% of shares outstanding. The Berkshire Hathaway (BRK-A) (BRK-B) CEO increased his position quarter by quarter during the past five years albeit staying put during the second quarter of 2016.

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New feature: Podcasts

On Sept. 6, GuruFocus introduced the podcast, which brings interviews with influential investing leaders and extended discussion with contributors on value investing. As of Oct. 14, we have two podcasts, one on the future outlook of Apple Inc. (AAPL) and one on the deep analysis of Wells Fargo after the scandal. All members have access to our podcasts, and you can subscribe to the podcast on iTunes.

Disclosure: The author has no position in Wells Fargo.

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This article first appeared on GuruFocus.