Driven by top-line growth, Wells Fargo & Company (WFC) earned $1.02 per share in third-quarter 2014, thereby surpassing 99 cents earned in the year-ago quarter. However, the reported figure was in line with the Zacks Consensus Estimate.
Despite positive market sentiment, shares of Wells Fargo declined around 1% in the pre-market session, indicating that investors have been bearish on the results. The price reaction during the full trading session will give a fair idea about the extent of disappointment among investors.
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.
Wells Fargo also reported $300 million in reserve release (pre-tax), attributable to its improved credit performance. However, the company experienced a slight rise in non-interest expenses and higher provisions.
Third-quarter net income applicable to common stock came in at $5.4 billion, up 2% year over year.
The quarter’s total revenue came in at $21.2 billion, outpacing the Zacks Consensus Estimate of $21 billion. Moreover, revenues jumped 4% year over year.
Furthermore, segment-wise, on a year-over-year basis, Community Banking, Wholesale Banking and the Wealth, Brokerage and Retirement segments’ total revenue jumped 4.9%, around 1% and 7.3%, respectively.
Performance in Detail
Wells Fargo’s net interest income for the quarter came in at $10.9 billion, up 2% 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 33 basis points year over year to 3.06%.
Non-interest income at Wells Fargo came in at $10.3 billion, up 6% year over year, mainly due to net gains on debt securities and equity investments, higher card fees as well as trust and investment fees and a slight rise in mortgage banking revenues. These negatives were partially mitigated by reduced net gains from trading activities.
As of Sep 30, 2014, total loans were $838.9 billion, increasing 3.7% on a year-over-year basis. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were $1.1 trillion, up 8.7% from the prior-year quarter.
Non-interest expense at Wells Fargo was $12.2 billion, up 1% 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 and equipment expenses.
The company’s efficiency ratio of 57.7% came in below 59.1% in the prior-year quarter and was within the targeted efficiency ratio range of 55%–59%. A fall in efficiency ratio indicates an improvement in profitability. Wells Fargo hopes to maintain its targeted efficiency ratio range in the fourth quarter of 2014.
Credit Quality
Wells Fargo reported improved credit quality metrics in the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $13.5 billion as of Sep 30, 2014, waning from $15.6 billion as of Sep 30, 2013.
Net charge-offs were $668 million or 0.32% of average loans in the reported quarter, down from the prior-year quarter net charge-offs of $975 million (0.48%). Nonperforming assets fell 14.5% to $17.7 billion in the quarter from $20.7 billion in the prior-year quarter.
Capital Position
Wells Fargo has maintained a solid capital position. The company purchased 48.7 million shares of its common stock in the third quarter. The company also entered into a forward repurchases transaction for an additional estimated 19.8 million shares, which is anticipated to settle in fourth-quarter 2014.
Wells Fargo’s Tier 1 common equity under Basel III (General Approach) increased to $136.5 billion from $134.8 billion in the prior quarter. The Tier 1 common equity to total risk-weighted assets ratio was 11.16% under Basel III (General Approach) as of Sep 30, 2014.
The company’s estimated Tier 1 common equity ratio was an estimated 10.46% under Basel III (Advanced Approach). The Tier 1 leverage ratio was 9.68% as of Sep 30, 2014, down from 9.76% as of Sep 30, 2013.
Tier 1 capital ratio was 12.60% as of Sep 30, 2014 compared with 12.11% as of Sep 30, 2013. Book value per share increased to $31.55 from $28.98 in the prior-year quarter.
Our Viewpoint
The positive developments of the sector and a gradually improving macro economy helped the banking behemoth to post impressive earnings.
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. Moreover, 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 raised investors’ confidence.
Other two banking majors – Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) which have kick started the third-quarter earnings along with Wells Fargo, have beat the Zacks Consensus Estimate.
JPMorgan came out with earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39. The number also compares favorably with $1.42 earned in the year-ago quarter. Earnings exclude the impact of 26 cents per share related to the after-tax Firmwide legal expense. Considering this significant one-time item, the company has earned $1.36 per share.
Citigroup reported yet another impressive quarter. Adjusted earnings per share for third-quarter 2014 came in at $1.15, outpacing the Zacks Consensus Estimate of $1.12. Further, earnings compared favorably with the year-ago figure of $1.02 per share.
Among other Wall Street giants, Bank of America Corporation (BAC) will report on Oct 15.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment