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Can Wells Fargo (WFC) Maintain Its Beat Streak in Q3 Earnings?

Wells Fargo & Company WFC is slated to announce third-quarter 2021 results, before the opening bell, on Oct 14. The company’s earnings are expected to have improved year over year, while revenues are projected to have declined.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on improved investment advisory and other asset-based fees, aided by higher market valuations as well as lower costs. However, reduced net interest income (NII) on lower rates and lower loans was the undermining factor.

Over the trailing four quarters, Wells Fargo’s earnings have surpassed the consensus estimate on all four occasions, the surprise being 31.3%, on average.

Wells Fargo & Company Price and EPS Surprise

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

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

In late August, Wells Fargo announced the combination of its Treasury Management and Global Payment Solutions businesses under the Global Treasury Management umbrella.

Legal hassles escalated for Wells Fargo in early September when the Office of the Comptroller of the Currency (“OCC”) assessed a $250-million civil money penalty on the company on the grounds of “unsafe or unsound practices” related to the home-lending loss mitigation program. With the failure of the program, which required the bank to repay customers, who were charged excessive or improper fees, the company has violated the terms of the 2018 consent order that condemned its risk management systems. The penalty is likely to have escalated the company’s expenses for the third quarter.

In addition to the hefty fine, the banking giant has been slapped with an enforcement action, limiting it from acquiring certain third-party residential mortgage servicing, while ensuring that borrowers are not transferred out of its loan portfolio until the remediation actions are executed. In the following week, U.S. Senator Elizabeth Warren addressed a letter to the Fed, urging the central bank to revoke Well Fargo’s license as a financial holding company.

The senator stated that the $250-million fine against the bank shows it to be an "irredeemable repeat offender". Hence, the company’s core traditional banking activities should be separated from its other financial services and Wall Street operations. The bifurcation, if executed, will ensure that the bank’s customers stay protected until its transition is completed.

Legal woes aside, lets now look at the other factors that might have influenced Wells Fargo’s quarterly performance:

Muted Net Interest Income and Margin Growth: Overall growth in loans was moderate in the third quarter. Per the Fed’s latest data, real estate, consumer loan, auto loan and card loan portfolio growth has supported the lending business. In the third quarter, the yield curve spread widened, with the 10-year Treasury yield rising significantly at the quarter end, thereby, likely propelling NII. Additionally, the deposit balance is likely to have been stable or grown modestly, supported by government stimulus. This too is likely to have aided NII.

Conversely commercial and industrial loan portfolio remained weak as the low-interest rate environment has made borrowing through other avenues like capital markets more attractive. Also, high levels of pay downs and payoffs as well as uncertainty surrounding tax, regulatory and economic backdrop have likely been dampeners.

Amid these considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $8.9 billion, suggesting a 4.6% decline from the prior-year quarter’s reported figure.

The bank’s net interest margin is expected to have continued to be affected by the low-rate backdrop, excess bank liquidity being invested in cash-like investments offering low yields, muted loan growth and competitive loan pricing landscape.

Declining Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to normalize in the third quarter. Mortgage banking revenues are facing tough comps from the origination boom in 2020, thanks to ultra-low mortgage rates.

In the quarter under review, mortgage rates increased sequentially. Mortgage origination activities are estimated to have decreased dramatically, with rising rates discouraging refinancing activity. Nonetheless, given the strong housing market conditions, homebuying activities continued in the quarter under review. Hence, purchase originations are likely to have offered some relief.

Management expects mortgage originations to decline in the third quarter, with retail origination volumes declining less than the industry on the back of its efforts to improved capability to cater to the mortgage financing needs.

The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $1.19 billion for the third quarter, which suggests a 25.4% decline from the prior-year quarter’s reported number.

Overall Non-Interest Revenue Growth: Equity markets held strong in the third quarter, boosting market-driven revenues. This is expected to have supported wealth, trust, trading and asset management revenues.

Moreover, with additional stimulus and continued economic reopenings; card fees are anticipated to have supported consumer spending in the quarter under review. Deposit service charges should have continued to normalize as the pandemic-related concessions continue to retract.

High volatility in the equity markets in September due to the Fed meeting is expected to have spiked trading volumes in equities, providing decent support to trading revenues. This is likely to have been offset by low fixed-income trading activities.

Similar to the past several quarters, deal-making continued at a faster pace in third-quarter 2021. This was primarily driven by robust macroeconomic expectations, companies deploying their cash reserves and increasing confidence in the economic recovery.

High Expenses: Wells Fargo’s costs are expected to have continued to flare up in the quarter under review, given its franchise investments in technology and digitalization efforts. Additionally, customer remediation expenses and ongoing litigation hassles are anticipated to have resulted in elevated legal costs in the quarter to be reported.

Asset Quality: Card delinquency rates and commercial bankruptcies were low in third-quarter 2021. Given the backdrop of continued improvement in credit trends, Wells Fargo is expected to have witnessed additional reserve releases in the third quarter.The company’s second-quarter results were supercharged with the impact of a $1.6-billion decline in allowance for credit losses, backed by an improving economic environment and lower net charge-offs. This is likely to have continued in the third quarter as well, supported by hefty government stimulus.

Here is what our quantitative model predicts:

Wells Fargo has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing 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 +1.15%.

Zacks Rank: Wells Fargo currently carries a Zacks Rank of 3.

Prior to the third-quarter earnings release, Wells Fargo’s activities during the July-September period were adequate to gain adequate analyst confidence. Notably, the Zacks Consensus Estimate for third-quarter earnings has been revised upward to $1.04 over the past month. Also, it suggests a year-over-year increase of 86%.

However, the consensus estimate of $18.7 billion for quarterly revenues indicates a marginal decline from the prior-year quarter’s reported number.

Stocks That Warrant a Look

Here are a few bank stocks that you may want to consider as these have the right combination of elements to post earnings beat in their upcoming releases, per our model.

The Earnings ESP for JPMorgan JPM is +1.77% and it carries a Zacks Rank #2 (Buy) at present. The company is slated to report third-quarter 2021 results on Oct 13.

Bank of America BAC is scheduled to release third-quarter results on Oct 14. The company currently carries a Zacks Rank #3 and has an Earnings ESP of +0.30%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S. Bancorp USB is scheduled to release earnings on Oct 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.93%.

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U.S. Bancorp (USB) : Free Stock Analysis Report

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