What’s in Store for Wells Fargo This Earnings Season?

Third-quarter expectations

Wells Fargo (WFC) is scheduled to report its third-quarter results on October 12. It’s expected to post EPS of $1.17, implying a growth of 12.5% YoY (year-over-year) and 8.3% sequentially. Analysts project revenues to fall 1.1% YoY to $21.8 billion, reflecting a lower credit offtake and weaker trading activity.

What’s in Store for Wells Fargo This Earnings Season?

Wells Fargo’s operating performance has remained mostly stagnant with no significant growth since 2017. Its non-interest trading and advisory income and its credit growth have lagged its major banking peers (XLF).

Wells Fargo draws most of its trading income from debt-related offerings. However, the Fed’s hawkish monetary policy has led to withdrawals from debt-related offerings, thus hurting its trading revenues.

Withdrawals due to rate hikes have been partially offset by concerns related to higher equity valuation, which have led to institutional investors recently offloading equities and investing in debt and alternatives. In the second quarter of 2018, Wells Fargo’s market-sensitive revenue fell YoY to $527 million from $1 billion due to impairments, lower gains from holdings, and lower trading revenue.

Its mortgage banking revenue has fallen in recent quarters due to rising interest rates. Higher rates have led to prepayments from borrowers, lowering mortgage-servicing income. In the second quarter, its mortgage banking revenue fell YoY to $770 million from $934 million.

Recent numbers

Since 2016, WFC has been grappling with fraud- and compliance-related issues, which has resulted in the loss of several corporate clients. To counter those issues, it has deployed strict underlying guidelines on the lending front. However, more stringent rules and guidelines have slowed down its balance sheet expansion. Its credit book has declined sequentially in four of the last five quarters.

Wells Fargo’s second-quarter EPS of $0.98 fell ~9% YoY and missed analysts’ consensus estimate of $1.12. Its quarterly earnings included a discrete income tax expense of $481 million. Its net interest income of $12.5 billion marked a 1% YoY improvement, mainly driven by rate spread expansion.

In comparison, Wells Fargo’s top peers JPMorgan Chase (JPM), Citigroup (C), and Goldman Sachs (GS) reported YoY rises of 34%, 27%, and 51%, respectively, for their second-quarter EPS.

In this series, we’ll look at the factors that may impact Wells Fargo’s earnings and revenues, as well as Wall Street’s expectations and its valuations.