Amid a challenging industry backdrop, Wells Fargo & Company’s (WFC) fourth-quarter 2014 earnings met expectations. The financial bigwig came out with earnings per share of $1.02, meeting the Zacks Consensus Estimate. Also the reported figure came above the year-ago figure of $1.00.
For the year ended 2014, earnings per share were $4.10, came inline with the Zacks Consensus Estimate. When compared with the prior-year figure, it increased 5%.
Shares of Wells Fargo declined over 1% in the beginning of the trading session, indicating that investors have been bearish on the results. However, the price reaction during the full trading session will give a fair idea about the extent of disappointment among investors.
The company recorded higher revenues and total loans and deposits continued to exhibit growth in this quarter as well. Also the company recorded reserve release of $250 million, reflecting an improving credit quality. However, higher expenses and increased provision for loan losses were on the downside.
Fourth-quarter net income applicable to common stock came in at $5.4 billion, stable year over year.
The quarter’s total revenue came in at $21.4 billion, marginally outpacing the Zacks Consensus Estimate of $21.2 billion. Moreover, revenues jumped 4% year over year.
Revenues for the year ended 2014 were $84.3 billion, up 1% year over year. Additionally, it surpassed the Zacks Consensus Estimate of $84.1 billion.
Furthermore, segment-wise, on a year-over-year basis, Community Banking, Wholesale Banking and the Wealth, Brokerage and Retirement segments’ total revenue increased 5%, around 1% and 6%, respectively.
Performance in Detail
Wells Fargo’s net interest income for the quarter came in at $11.2 billion, up 3% on a year-over-year basis. Increased interest income from trading assets and investment securities, along with lower deposits costs, aided the results. However, net interest margin decreased 23 basis points year over year to 3.04%.
Non-interest income at Wells Fargo came in at $10.3 billion, up 4% year over year, mainly due higher net gains on debt securities and equity investments, card fees, trust and investment fees as well as other income. These positives were partially offset by lower service charges on deposit accounts, insurance income, lease income, reduced net gains from trading activities and net gains from equity investments.
As of Dec 31, 2014, total loans were $862.6 billion, increasing 5% on a year-over-year basis. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were $1.16 trillion, up 8% from the prior-year quarter.
Non-interest expense at Wells Fargo was $12.6 billion, up 5% from the prior-year quarter. The rise in expenses was primarily attributable to higher commission and incentive compensation, FDIC and other deposit assessments along with other expenses. These were partially offset by lower core deposit and other intangibles as well as reduced employee benefits.
The company’s efficiency ratio was 59.0%, up from 58.5% in the prior-year quarter. A higher efficiency ratio indicates a fall in profitability. Wells Fargo expects to maintain its targeted efficiency ratio in the range of 55%–59% for full year 2015.
Credit Quality
Wells Fargo reported improved credit quality metrics in the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $13.2 billion as of Dec 31, 2014, waning from $15.0 billion as of Dec 31, 2013.
Net charge-offs were $735 million or 0.34% of average loans in the reported quarter, down from the prior-year quarter net charge-offs of $963 million (0.47%). Nonperforming assets fell 21% to $15.5 billion in the quarter from $19.6 billion in the prior-year quarter.
Capital Position
Wells Fargo has maintained a solid capital position. The company purchased 61.6 million shares of its common stock in the fourth quarter. The company also entered into a forward repurchases transaction for an additional estimated 14.3 million shares, which is anticipated to settle in first-quarter 2015.
Wells Fargo’s Tier 1 common equity under Basel III (General Approach) increased to $137.2 billion from $135.9 billion in the prior quarter. The Tier 1 common equity to total risk-weighted assets ratio was 11.04% under Basel III (General Approach) as of Dec 31, 2014.
The company’s Tier 1 common equity ratio was an estimated 10.44% under Basel III (Advanced Approach, fully phased-in). The Tier 1 leverage ratio was 9.45% as of Dec 31, 2014, down from 9.60% as of Dec 31, 2013.
Tier 1 capital ratio was 12.45% as of Dec 31, 2014 compared with 12.33% as of Dec 31, 2013. Book value per share increased to $32.19 from $28.48 in the prior-year quarter.
Our Viewpoint
Results reflect a decent quarter for the Wall Street banking giant, given the fact that the fourth quarter witnessed several challenges across the financial industry particularly legal issues and the stricter regulatory environment.
Looking at the fundamentals, Wells Fargo’s growth plans have historically included a large number of acquisitions, the Wachovia acquisition in Dec 2008 being the largest. Additionally, Wells Fargo announced consecutive dividend increases over the past few years with the latest hike of 17% being announced in Apr 2014.
Though Wells Fargo has reported decent revenue growth on a year-over-year basis, we expect top-line headwinds to persist, given the protracted economic recovery. Moreover, a low interest rate environment would keep Wells Fargo’s margins under pressure. With the thrust of banking regulations, there will be pressure on fees and loan growth. Higher legal costs could drive down profitability.
We believe that in the long term, investors will not be disappointed with their investment in Wells Fargo, given its diverse geographic and business mix, which enables it to sustain consistent earnings growth. Going forward, we believe that strategic acquisitions will help the company to expand its business and boost profitability.
In our view, long-term investors who can absorb risks related to economic and regulatory fluctuations can expect decent earnings growth for Wells Fargo in the future. Solid capital levels, prudent expense management as well as expected improvement in credit quality will support its profit figures. Additionally, the company’s strong deployment activities raise investors’ confidence.
Banking major JPMorgan Chase & Co. (JPM), which kickstarted fourth-quarter earnings along with Wells Fargo, beat the Zacks Consensus Estimate.
JPMorgan came out with adjusted earnings of $1.45 per share, ahead of the Zacks Consensus Estimate as well as the prior-year quarter earnings of $1.30 per share. Earnings exclude an impact of $990 million related to after-tax legal expenses. Considering this significant one-time item, the company has earned $1.19 per share.
Among other Wall Street giants, Citigroup Inc. (C) and Bank of America Corporation (BAC) will report on Jan 15.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold).
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