Wells Fargo & Company (WFC) is scheduled to report its fourth-quarter 2014 results before the opening bell on Wednesday, Jan 14. Too many questions linger in investors' minds this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.
In the last quarter, this banking giant delivered a 3.03% year-over-year earnings improvement on the back of higher revenues. Total loans and deposits grew and the company recorded higher revenues. Moreover, a strong capital position and returns on assets and equity acted as the positives.
Will Wells Fargo be able to keep the earnings streak alive after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.
Factors to Influence Q4 Results
Banks’ efforts to settle lawsuits related to shoddy pre-crisis mortgage practices remained the key trend in the quarter. This was accompanied by dumping unprofitable businesses and concentrating on those with strong potential. The tide of operating environment has not been favorable since the beginning of the year, but the U.S. banks proved their mettle and stayed afloat. In spite of the nagging, and perhaps heightened, structural pressure and weakness in key segments – capital market business and mortgage banking, cost containment and modest improvement in some segments managed to counter the stress.
Continued expense control and balance sheet restoration should act as tailwinds in the quarter. Wells Fargo has implemented company-wide expense management initiatives. In addition, with the completion of the integration process and the continuance of the economic recovery, expenses are anticipated to decrease, thereby providing opportunities for future improvement in operating leverage. Notably, the company expects to maintain targeted efficiency ratio range of 55–59% in the fourth quarter.
Further, a favorable equity and asset market backdrop plus supportive macroeconomic factors – such as falling unemployment, a progressive housing sector and flexible monetary policy – should pave the way for stability.
However, interest rate spreads are unlikely to support the top line any time soon as the Fed intends to keep interest rates low for a considerable time –– at least no revision is expected before mid-2015. Moreover, liquidity coverage rule (LCR) requirements will keep net interest margins under pressure. Efforts to strengthen the top line by focusing more on non-interest income have also not been working effectively.
Further, legal costs are now an integral part of Wells Fargo’s financials. With increasing regulatory scrutiny on the business model, Wells Fargo is not expected to rid itself of such expenses, at least in the near term, though settlement efforts should take the burden off its shoulders.
Activities of Wells Fargo during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at $1.02 per share over the last seven days.
Earnings Whispers
Our proven model does not conclusively show that Wells Fargo is likely to beat the Zacks Consensus Estimate in the fourth quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for Wells Fargo is -1.96%. This is because the Most Accurate estimate of $1.00 is below the Zacks Consensus Estimate by 2 cents.
Zacks Rank: Though Wells Fargo’s Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings surprise.
Stocks That Warrant a Look
Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
The earnings ESP for The PNC Financial Services Group, Inc. (PNC) is +0.57% and it carries a Zacks Rank #3. The company is scheduled to release its fourth-quarter results on Jan 16.
Capital One Financial Corporation (COF) has an earnings ESP of +3.47% and carries a Zacks Rank #3. It is expected to report its fourth-quarter results on Jan 22.
Wells Fargo and JPMorgan Chase & Co. (JPM) with exposure in almost all banking businesses are the first among the banking big shots to report fourth-quarter earnings. Therefore, their earnings releases are going to be a significant indicator of the performance of the key banking sector.
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