Wells Fargo’s Earnings: Will Growth Return?

Compliance and lending

Wells Fargo (WFC) underperformed its peers in 2017 due to a scam that opened fake accounts and compliance issues related to internal records for clients. Management is working on internal vigilance and compliance in order to deal with fraud and improve the corporate culture. The bank is scheduled to post its second-quarter earnings on July 13. Wells Fargo has an estimated EPS of $1.12—an implied growth of 5% on a year-over-year basis. The growth will likely be due to lower corporate taxes and interest margins.

Wells Fargo’s Earnings: Will Growth Return?

Wells Fargo’s drivers

In the second quarter, Wells Fargo’s revenues are expected to decline 2.2% to $21.7 billion due to lower non-interest income and credit offtake. For fiscal 2018, the bank could see deposit growth of ~2% and lending growth of 1.0%–1.5%. Wells Fargo continues to operate with strict underwriting guidelines. The guidelines and the Fed’s hawkish monetary policy are causing early repayments and lower credit offtake.

Wells Fargo stock has outperformed its peers. Wells Fargo posted gains of 6.4% in the past quarter in anticipation of an improved operating performance and a renewed focus on the core banking business. Financials (XLF) posted returns of -3.0% during the same period.

Other major banks are scheduled to announce their results on July 13. JPMorgan Chase (JPM) is expected to see higher interest income and lower trading and investment banking income. Citigroup (C) is expected to see a rise in its interest income and trading income partially offset by weaker investment banking revenues. Bank of America (BAC) is scheduled to announce its results on July 16 with improved lending and trading activity.

Strong balance sheet

Wells Fargo could target higher dividends and repurchases after clearing the stress tests in 2018. The bank could add another 15% to its dividend payout and increase repurchases to boost its return on equity.

Wells Fargo will have to target retail lending and have more exposure outside of mortgage lending in order to augment its lending book. Wells Fargo could increase its global footprint to diversify in the core banking, trading, and asset management businesses.