Riding on higher revenues, Wells Fargo & Company WFC delivered a positive earnings surprise of 6% in first-quarter 2015. The company reported earnings of $1.04 per share, outpacing the Zacks Consensus Estimate of 98 cents. However, the reported figure fell a penny below year-ago figure.
Shares of Wells Fargo declined over 1% in the beginning of the trading session. Perhaps, the investors have been bearish on the results as the company reported lower profits. First-quarter net income applicable to common stock came in at $5.5 billion, down 3% year over year. However, the price reaction during the full trading session will give a fair idea about the extent of disappointment among investors.
Results were aided by revenue growth, partially offset by higher expenses and increased provision for loan losses. Total loans and deposits continued to exhibit growth in this quarter as well. Also the quarter recorded improving credit quality and strong capital position.
The quarter’s total revenue came in at $21.3 billion, outpacing the Zacks Consensus Estimate of $21.1 billion. Moreover, revenues rose 3% year over year.
Segment-wise, on a year-over-year basis, Community Banking, Wholesale Banking and the Wealth, Brokerage and Retirement segments’ total revenue increased 2%, around 6% and 8%, respectively.
Quarter in Detail
Wells Fargo’s net interest income for the quarter came in at $11.0 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 25 basis points year over year to 2.95%.
Non-interest income at Wells Fargo came in at $10.3 billion, up 3% year over year, mainly due to higher trust and investment fees, mortgage banking revenues, card fees and higher net gains on debt securities and equity investments. These positives were partially offset by reduced net gains from trading activities and net gains from equity investments.
Non-interest expense at Wells Fargo was $12.5 billion, up 5% from the prior-year quarter. The rise in expenses was primarily attributable to higher commission and incentive compensation, employee benefits, FDIC and other expenses. These were partially offset by lower net occupancy costs as well as reduced costs related to core deposit and other intangibles.
The company’s efficiency ratio was 58.8%, up from 57.9% 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.
As of Mar 31, 2015, total loans were $861.2 billion, increasing 4% on a year-over-year basis. Growth in both the commercial and consumer portfolios contributed to the rise. Total deposits were around $1.20 trillion, up 9% from the prior-year quarter.
Credit Quality
Wells Fargo reported improved credit quality metrics in the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $13.0 billion as of Mar 31, 2015, waning from $14.4 billion as of Mar 31, 2014.
Net charge-offs were $708 million or 0.33% of average loans in the reported quarter, down from the prior-year quarter net charge-offs of $825 million (0.41%). Nonperforming assets fell 18% to $14.8 billion in the quarter from $18.1 billion in the prior-year quarter.
However, provision for credit losses increased 87% year over year to $608 million in the quarter.
Capital Position
Wells Fargo has maintained a solid capital position. The company purchased 48.4 million shares of its stock in the first quarter. The company also entered into a forward repurchases transaction for an additional estimated 14.0 million shares, which is anticipated to settle this month.
Wells Fargo’s Common Equity Tier 1 was $139.2 billion under the Standardized Approach versus $132.7 billion (General Approach) in the prior-year quarter. As of Mar 31, 2015, tier 1 common equity ratio under Basel III (Standardized Approach) stood at 10.86 % versus 11.31% (General Approach) as of Mar 31, 2014.
The company’s Tier 1 common equity ratio was an estimated 10.53% under Basel III (Advanced Approach, fully phased-in). The Tier 1 leverage ratio was 9.48% as of Mar 31, 2015, down from 9.84% as of Mar 31, 2014.
Tier 1 capital ratio was 12.39% as of Mar 31, 2015, compared with 12.63% as of Mar 31, 2014. Book value per share increased to $32.70 from $30.48 in the prior-year quarter.
Our Viewpoint
Wells Fargo started 2015 on a positive note. Results reflect a decent quarter for the Wall Street banking giant. The company benefited from higher mortgage banking revenues as it witnessed a spur in refinance applications due to the reduced mortgage rates in the quarter.
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, which announced consecutive dividend increases over the past few years remains committed to enhance shareholder value. In Mar 2011, the company received the Federal Reserve’s approval to its 2015 Capital Plan, boosting investors’ confidence on the stock.
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.
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.
JPMorgan Chase & Co. JPM, which kick-started the first-quarter earnings along with Wells Fargo, also beat the Zacks Consensus Estimate. The company has been able to turn things in its favor with earnings of $1.45 per share, beating the Zacks Consensus Estimate of $1.39. The bottom line also improved 13.3% over the year-ago earnings of $1.28 per share.
Among other Wall Street giants, Citigroup Inc. C and The Goldman Sachs Group, Inc. GS will report on Apr 16.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold).
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