uploads///Wells Fargo

Wells Fargo Beats Estimates, Weak Guidance Drags Stock Down


Jul. 17 2019, Published 7:47 a.m. ET

Wells Fargo (WFC) posted better-than-expected second-quarter results on Tuesday. The bank’s revenues and EPS beat analysts’ expectations. However, weak guidance dragged the shares down. Wells Fargo stock closed about 3% lower.

Wells Fargo’s management expects the net interest income to fall 5% on a YoY (year-over-year) basis. The new guidance is at the lower end of the previous forecast of a 2%–5% decrease in the net interest income. The company’s management expects the expenses to be at the higher end of its previous guidance. Investments in technology and risk management will likely drive the company’s expenses in 2019.

Wells Fargo’s net interest income is still weak due to higher deposit costs and a lower interest rate. An anticipated rate cut will likely aggravate the company’s problems. Citigroup, which posted better-than-expected second-quarter earnings on Monday, also expects rate cuts to impact its revenues.

Citigroup expects that for each 25 basis point cut in the interest rate, its quarterly revenues would be negatively impacted by $50 million. However, Citigroup stood by its earlier guidance and expects to grow its net interest income by roughly $2 billion in 2019.

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Meanwhile, JPMorgan Chase reduced its net interest income outlook amid a low-interest-rate environment. JPMorgan Chase expects to generate a net interest income of about $57.5 billion—down from its previous guidance of about $58 billion. The company posted better-than-expected second-quarter results on Tuesday.

Wells Fargo beat the estimates

Wells Fargo posted revenues of $21.6 billion in the second quarter, which beat analysts’ expectation of $20.9 billion. Higher non-interest income supported the bank’s revenues. However, the revenues remained flat on a YoY basis, which reflected lower net interest income and declines in market-sensitive revenues. Wells Fargo’s net interest income was $12.1 billion—down by $446 million YoY (year-over-year). However, the non-interest income increased by $477 million.

By business segments, the revenues stayed flat in the Community Banking segment. The lower net interest income offset the benefits from higher service charges on deposit accounts. The decline in market-sensitive revenues also remained a drag.

The revenues fell 2% in the Wholesale Banking segment, which reflected a lower net interest income and lower treasury management fees. However, growth in market-sensitive revenues and mortgage banking fees supported the revenues.

The Wealth and Investment Management revenues increased 3% due to gains from equity securities. However, the lower net interest income and asset-based fees remained a drag.

Wells Fargo posted an EPS of $1.30, which increased about 20% on a YoY basis. The second-quarter EPS beat analysts’ estimate of $1.15. The lower tax rate and share repurchases supported the company’s bottom-line growth.

Lower target prices

Several analysts lowered their target price on Wells Fargo stock following the bank’s weak guidance on the net interest income front. Evercore reduced its target price to $42 per share from $49. Jefferies lowered its target price to $43 from $46, while KBW lowered its target price to $44 from $47.

Most of the analysts recommended a “hold” on Wells Fargo stock. In contrast, analysts recommended a “buy” on Citigroup, JPMorgan Chase, and Bank of America. Among the 31 analysts tracking Wells Fargo, 19 recommended a “hold,” nine recommended a “buy,” and five recommended a “sell.”

Analysts have a consensus target price of $49.50 on Wells Fargo, which implies a potential upside of 9.3% based on its closing price on Tuesday.


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