On Aug 27, 2014, we issued an updated research report on Wells Fargo & Company (WFC). This regional bank recently reported impressive second-quarter 2014 results. Results were aided by lower non-interest expenses, increased loan and deposit balances and reduced provision for credit losses, partially offset by declining mortgage banking revenues. Though the company shows stability in its fundamentals, we remain cautious due to the current economic uncertainty across the industry.
Wells Fargo reported second-quarter 2014 earnings of $1.01 per share, thereby surpassing 98 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate. Net income was up 3% year over year to $5.4 billion.
The company exhibited a decent performance in the last four quarters as evident from its earnings history. Positive earnings surprises were posted in 3 of the last 4 quarters with an average beat of 4.12%.
Wells Fargo has implemented company-wide expense management initiatives. In addition, with the completion of the integration process and the continuation of the economic recovery, expenses are anticipated to decrease, thereby providing opportunities for future improvement in operating leverage. Notably, efficiency ratio for the first-half of 2014 was 57.9%, within the targeted efficiency ratio range of 55–59%.
Wells Fargo remains focused on managing capital levels efficiently. This is well evident from the clearance of the 2014 stress test and estimated Tier 1 common equity under Basel III increasing to 10.14% as of Jun 30, 2014, under the advanced approach (fully phased-in). Further, Wells Fargo returned $7.3 billion to shareholders through dividends and share repurchases in the first-half of 2014. We anticipate such capital deployment activities to boost investors’ confidence.
Despite strong fundamentals, we believe there are certain issues that may create pressure on the company’s financials in the near term. These include absence of credible improvement in the mortgage market, declining net interest margin due to low interest rate environment and the prevailing stringent regulatory landscape.
Following the second-quarter 2014 results, the Zacks Consensus Estimate over the past 30 days remained stable at $4.10 and $4.27 per share, for 2014 and 2015, respectively. Hence, Wells Fargo currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Some better-ranked finance stocks include Bank of the Ozarks, Inc. (OZRK), Farmers Capital Bank Corporation (FFKT) and First Community Bancshares, Inc. (FCBC). All three stocks carry a Zacks Rank #1 (Strong Buy).
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