Can Wells Fargo (WFC) Retain Its Beat Streak in Q3 Earnings?
Wells Fargo & Company WFC is scheduled to report third-quarter 2023 results on Oct 13, before the opening bell. The company’s quarterly revenues are expected to have improved year over year, while earnings are projected to have declined.
In the last reported quarter, WFC’s earnings beat the Zacks Consensus Estimate on higher net interest income (NII) and non-interest income. The improvement in capital and profitability ratios was another positive. However, higher provisions for credit losses and a rise in expenses were the undermining factors.
Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on all four occasions, the average surprise being 10.3%.
Wells Fargo & Company Price and EPS Surprise
Wells Fargo & Company price-eps-surprise | Wells Fargo & Company Quote
Key Developments During the Quarter
In Late September, Wells Fargodivested around $2 billion of private equity investments in Norwest Equity Partners and Norwest Mezzanine Partners to a buyer group, including AlpInvest Partners, Atalaya Capital Management, Lexington Partners and Pantheon. The divestiture of these private equity funds enabled the company to explore avenues for growth and profitability by freeing up resources for strategic reallocation.
Let’s take a look at factors that are expected to have influenced Wells Fargo’s third-quarter earnings.
Loans and NII: Banks’ lending activities are likely to have been muted in the third quarter due to the challenging macroeconomic backdrop and high interest rates. While demand for commercial and industrial loans improved in July and August, it remained muted, per the Fed’s latest data. Moreover, commercial real estate loans declined in July and August from the second-quarter end. Nonetheless, consumer loans were stable in August from the second-quarter 2023 end.
In July 2023, the Fed raised interest rates by 25 basis points to a target of 5.25-5.5%, marking the 11th time the FOMC has raised interest rates in a tightening process that began in March 2022. The interest rate was the highest in around 22 years.
Driven by interest rate hikes, Wells Fargo is expected to have witnessed an improvement in earning asset yields in the quarter to be reported. Also, lower mortgage-backed securities premium amortization is expected to have aided NII.
However, an inverted yield curve, deposit migrations and higher funding costs are expected to weigh on NII and margins.
Amid these considerations, the Zacks Consensus Estimate for WFC’s NII is pegged at $12.73 billion, indicating a 5.3% rise from the prior-year quarter’s reported figure.
Non-Interest Revenues: The company is likely to have seen lower deposit-related fees due to an expected decline in deposits. The consensus mark for the same is pegged at $1.18 billion, implying a year-over-year decrease of 7.8%.
In the third quarter, mortgage rates continued to increase, with the rate on a 30-year fixed mortgage reaching 7.31% in September, the highest level in nearly 23 years. The climb in mortgage rates, which kept home buyers on the sidelines, led to a smaller origination market, both purchase and refinancing, compared with the prior-year quarter.
Hence, being one of the preeminent bank mortgage lenders in the United States, WFC is likely to have continued seeing declines in its home lending portfolio and mortgage banking income in third-quarter 2023. The Zacks Consensus Estimate for WFC’s third-quarter 2023 mortgage banking revenues is pegged at $221 million, implying a 31.8% fall on a year-over-year basis.
Wells Fargo’s investment advisory and other asset-based fee revenues are likely to have borne the brunt of weak equity and fixed-income market performance. A dip in market valuations and lower transactional activities are expected to have been headwinds. The consensus mark for investment advisory and other asset-based fee revenues is pegged at $2.23 billion, implying a year-over-year rise of 5.8%.
Merger and acquisition activities continued to be depressed in the third quarter, with total deal value declining from the prior year. High interest rates, increased antitrust scrutiny, fears of a global recession and looming U.S. federal government shutdown are likely to have acted as headwinds for merger and acquisition deals.
While there was a pick up in activity in September, equity capital market fees and debt capital market fees are expected to have declined in the third quarter, given low IPOs and follow-up equity issuances, as well as bond issuance. This is expected to have affected WFC’s investment banking fees. Nonetheless, the Zacks Consensus Estimate for the same is pegged at $386 million, suggesting a 2.9% rise from the prior-year quarter’s reported number.
The Zacks Consensus Estimate for Wells Fargo’s total non-interest income is pegged at $7.38 billion, suggesting a marginal decline from the prior-year quarter’s reported number.
Expenses: Wells Fargo’s costs are expected to have continued to flare up in the third quarter, given its franchise investments in technology and digitalization efforts. Additionally, amid the rising inflation, salary expenses are anticipated to have led to elevated non-interest expenses. This is likely to have hindered bottom-line growth in the quarter under review.
Asset Quality: With expectations of a worsening macroeconomic outlook, growing recession risk, slower GDP growth and the potential for deteriorating employment conditions, Wells Fargo’s credit quality is likely to have deteriorated. Moreover, given the heightened market volatility, commercial loan defaults are expected to have risen. Hence, as WFC has substantial exposure to commercial loans, it is likely to have set aside reserves in the third quarter.
The consensus mark for total non-accrual loans is pegged at $7.41 billion, implying a year-over-year rise of 32.6%.
What Our Model Predicts
According to our quantitative model, the chances of WFC beating the Zacks Consensus Estimate for earnings this time are high. This is because it has the combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.
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 +3.83%.
Zacks Rank: WFC currently carries a Zacks Rank of 3.
The Zacks Consensus Estimate for third-quarter earnings has been unrevised in the past month to $1.24 per share. Also, it suggests a year-over-year decline of 4.6%.
The consensus estimate for quarterly revenues of $20.20 billion indicates a 3.5% increase from the prior-year quarter’s reported number.
Other Banks That Warrant a Look
The PNC Financial Services Group, Inc. PNC and M&T Bank Corporation MTB are a couple of bank stocks that you may want to consider, as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.
The Earnings ESP for PNC is +1.60% and the company carries a Zacks Rank #3 at present. It is slated to report third-quarter 2023 results on Oct 13. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for PNC’s third-quarter earnings has moved marginally south over the past week.
MTB is scheduled to release third-quarter 2023 results on Oct 18. It currently has an Earnings ESP of +2.61% and a Zacks Rank #3.
The Zacks Consensus Estimate for MTB’s third-quarter earnings has been unchanged over the past month.
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Wells Fargo & Company (WFC) : Free Stock Analysis Report
The PNC Financial Services Group, Inc (PNC) : Free Stock Analysis Report
M&T Bank Corporation (MTB) : Free Stock Analysis Report
