Earnings to improve despite low margins
Wall Street analysts (SPY) expect Wells Fargo to report good earnings for the third quarter despite interest rates playing spoilsport. Wells Fargo has exceeded analyst expectations and managed to generate a positive earnings surprise for the past nine quarters.
In a September meeting, the Federal Reserve decided to delay an interest rate hike, citing global concerns as the reason. US banks earn lower returns on their assets as well as lower interest-based income when interest rates are low. The Federal Reserve’s decision not to raise interest rates in September is also likely to impact trading desks at the banks, which could weigh on banks’ bottom lines.
However, analysts expect third quarter earnings for Wells Fargo to increase. According to consensus data from Bloomberg, net revenues for the bank are expected to be $22.2 billion, higher than the $21.2 billion in 3Q14. In 2Q15, the company reported revenues of $21.3 billion. Net income is expected to be $5.5 billion for the quarter compared to $5.7 billion in the second quarter.
Earnings per share (or EPS) is expected to be $1.05 for the quarter compared to $1.03 in 2Q15.
Large portions of banks’ loan portfolios are indexed to the prime rates that are directly related to the federal funds rate. The Federal Reserve’s decision not to hike the rate at their September meeting means banks’ profitability from their loan portfolios will be under pressure. Thus, net interest margins on Wells Fargo’s loan portfolios are expected to fall, but substantial loan and deposit growth will offset this effect and boost the company’s overall net interest income.
Wells Fargo earnings tend to follow earnings of competitors like J.P. Morgan (JPM) and Bank of America (BAC). Peers like Citigroup (C) and Goldman Sachs (GS) will report their earnings in the upcoming days.