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Wells Fargo (WFC) Q4 Earnings Beat Estimates, Costs Decline

Zacks Equity Research

Backed by lower expenses, Wells Fargo WFC delivered a positive earnings surprise of 3.4% in fourth-quarter 2018. Earnings of $1.21 per share surpassed the Zacks Consensus Estimate of $1.17. Also, the bottom-line compared favorably with $1.16 recorded in the prior-year quarter.

Net income for the quarter came in at $6.1 billion compared with $6.2 billion reported a year ago.

Decline in expenses and higher net interest income aided results. Moreover, improving credit quality was a tailwind. However, decline in fee income was an undermining factor. Further, reduction in loans and deposits acted as headwinds in the quarter.

For the year ended 2018, earnings were $4.28, up 18 cents from the prior year. The bottom line also surpassed the Zacks Consensus Estimate of $4.25.

The quarter’s total revenues came in at $21 billion, lagging the Zacks Consensus Estimate of $21.6 billion. Also, the top line compared unfavorably with the prior-year quarter figure of $22.1 billion.

Revenues for the year were $86.4 billion, down 2.3% year over year. However, revenues surpassed the Zacks Consensus Estimate of $86.3 billion.

On a year-over-year basis, quarterly revenue generation at the business segments disappointed. The Community Banking segment’s total quarterly revenues decreased 2.2%, Wholesale Banking revenues were down 6.9% and revenues in the Wealth and Investment Management unit fell nearly 9%.

Loans & Non-Interest Income Fall, Costs Decline, NII Improves

Wells Fargo’s net interest income (NII) in the fourth quarter came in at $12.6 billion, up 3% year over year. Increased interest income from debt securities, loans held for sale, loans, equity securities, along with higher other interest income, were mostly offset by higher interest expenses and lower mortgage loans held for sale. Further, net interest margin expanded 10 basis points year over year to 2.94%.

Non-interest income at Wells Fargo came in at $8.3 billion, down 14%, primarily due to fall in almost all components of income, including mortgage banking and insurance income. This was partly offset by higher other income.

As of Dec 31, 2018, total loans were $953.1 billion, down slightly year over year. This was due to reduction in consumer loans, partly offset by higher commercial loans. Total deposits came in at $1.3 trillion, down 4% from the prior-year quarter.

Non-interest expenses at Wells Fargo were around $13.3 billion, down 21% from the year-earlier quarter. This decline in costs primarily stemmed from fall in commission and incentive compensation, along with lower other expenses.

The company’s efficiency ratio of 63.6% came in below 76.2% recorded in the year-ago quarter. A fall in efficiency ratio indicates improvement in profitability.

Credit Quality Improves

Wells Fargo’s credit quality metrics improved in the fourth quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $10.7 billion as of Dec 31, 2018, down 10.5% year over year.

Provision for credit losses was $521 million, falling 20%. Net charge-offs were $721 million or 0.30% of average loans in the fourth quarter, down 5.2% from the year-ago quarter’s net charge-offs of $751 million (0.31%). Non-performing assets were down 16.2% to $6.9 billion in the from $8.3 billion reported a year ago.

Capital Position

Wells Fargo maintained a solid capital position. In the October-December quarter, the company repurchased 142.7 million shares of its common stock, which net of issuances, reduced period-end common shares outstanding by $130.3 million.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $146.4 billion from $154 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.7% under Basel III (fully phased-in) as of Dec 31, 2018, compared with 12% recorded in the year-earlier quarter.

Book value per share advanced to $38.06 from $37.44 recorded in the comparable period last year.

Our Viewpoint

Top-line headwinds, aided by lower fee income were perceived. Slowdown in the mortgage business continued to remain a overhang. Nevertheless, improved credit quality reflecting lower provisions were the positives. Also, lower expenses was a tailwind.

Wells Fargo’s focus on maintaining its financial position through impressive cost-cutting targets might help combat legal tensions. Moreover, the company is working on strategic initiatives, which might help it regain confidence of clients and shareholders.

We believe, over the long term, investors will not be disappointed in Wells Fargo given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. We also anticipate that strategic acquisitions and the bank’s efforts to address current adversities will help it expand business and enhance profitability.

Wells Fargo & Company Price, Consensus and EPS Surprise

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

 

Currently, Wells Fargo carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other major banks, Bank of America Corp. BAC and U.S. Bancorp USB are scheduled to report fourth-quarter results on Jan 16. Northern Trust NTRS will be releasing results on Jan 23.

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