Why Q4 Earnings Might Not Lift Wells Fargo Stock


Jan. 10 2020, Published 7:32 a.m. ET

Wells Fargo (NYSE:WFC) will report its fourth-quarter earnings before the markets open on January 14.

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Wells Fargo’s earnings to stay pressured

We expect Wells Fargo’s revenues to decline in the fourth quarter, which reflects the NII (net interest income). Meanwhile, the company’s EPS could improve due to the lower outstanding share count. However, the EPS growth might stay low, which reflects a decline in the NII and higher non-interest expenses.

Analysts expect Wells Fargo to post revenues of $20.12 billion, which indicates a year-over-year decline of about 4%. Balance sheet repricing, due to the lower interest rate environment, will likely take a toll on its NII and top line.

Notably, Fed Chair Jerome Powell made three rate cuts last year, which will likely impact banks’ NII. Earlier, Wells Fargo decreased its NII outlook due to lower interest rates. Meanwhile, JPMorgan Chase (NYSE:JPM) reduced its NII outlook twice for 2019.

Citigroup (NYSE:C), which will also announce its fourth-quarter earnings on January 14, expects its net interest revenues to stay low due to lower short-term rates.

Despite the lower NII, Citigroup’s top line will likely gain from higher non-interest revenues and growth in loans and deposits. More operating leverage and share buybacks could drive double-digit growth in Citigroup’s bottom line. However, that isn’t the case with Wells Fargo. Lower revenues and higher expenses, compared to its peers, will likely take a toll on Wells Fargo’s bottom-line growth.

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Stock faces a downgrade due to earnings concern

A few analysts downgraded Wells Fargo stock due to concerns about its profitability. Baird downgraded Wells Fargo stock from “neutral” to “underperform.” Baird remains cautious about the bank’s prospects. Analyst David George doesn’t expect a recovery soon.

In December 2019, Raymond James analyst David Long downgraded Wells Fargo stock due to concerns its revenues and margins. The analyst expects Wells Fargo’s revenues to continue to decline in 2020. Notably, the consensus estimate indicates that the company’s revenues could decrease by 2% in 2019 and by 5.4% in 2020.

On the profitability front, analysts’ consensus estimate indicates a YoY decline of 5.3% in Wells Fargo’s EPS.

Concerns about slower loan growth amid heightened competitive activity and higher expenses might be a challenge for Wells Fargo. Also, lower short-term rates will likely hurt the company’s NII. Wells Fargo’s high valuation, compared to its peers, could limit the upside in the stock.

Analysts maintain a neutral view on Wells Fargo stock

Among the 27 analysts, 16 recommend a “hold,” eight recommend a “sell,” and three recommend a “buy” rating on the stock. Wall Street has a consensus target price of $53.04 on Wells Fargo stock, which is roughly on par with its closing price on Thursday.


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