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Will Lower Rates Impact Wells Fargo's (WFC) Q1 Earnings?

Zacks Equity Research

Wells Fargo WFC is scheduled to report first-quarter 2020 earnings, before the opening bell, on Apr 14.

During the March-end quarter, Wells Fargo entered into a $3-billion deal with the U.S. Department of Justice and the Securities and Exchange Commission (“SEC”), in order to settle the fake account-openings scandal that has been a major setback for the company since its breakout in 2016. Therefore, this move might have dampened the bank’s financials in the quarter.

The Fed slashed interest rates to near zero this March, in order to shield the U.S. economy from the coronavirus-related mayhem. This is likely to have substantially hurt Wells Fargo’s net interest margin and net interest income. However, low deposit costs might have been an offsetting factor for margins.

Here are the other factors that might have influenced Wells Fargo’s quarterly performance:

Dismal Non-Interest Revenues: Due to the pandemic, a slowdown in economic activity in the quarter is likely to have strained fee income. Outflows from the asset-management business might be recorded on market losses. Significant declines in the prices of asset values might have impacted asset-management fees. In addition, trust income is estimated to reflect disappointment due to weak markets.

Further, card fees might have been hurt in the quarter on lower consumer spending due to the pandemic. However, the impact of the coronavirus crisis on trading revenues is likely to have been moderate, as escalated volatility and volumes on uncertain markets might have been offsetting factors.

The Zacks Consensus Estimate for card fees is projected at $973 million, down 4.6% sequentially.

Loan Growth: Per the Fed’s latest data, loans balance are likely to have been high on a sequential basis for the March-end quarter supported by rise in commercial and industrial (C&I), real estate and consumer loans in the first two months of the quarter. However, a slight decline in demand for consumer loans in March due to the virus outbreak and soft demand for corporate loans as an uncertain economic environment resulted in lower business activities, leading to a decline in new investments, might have played spoilsport.

Decent Mortgage Banking: Wells Fargo’s mortgage banking revenues are likely to have improved on rise in mortgage refinance volume owing to low interest rates in the first quarter amid coronavirus pandemic. Nonetheless, despite lower mortgage rates, mortgage originations for the quarter might have been down due to seasonality. The Zacks Consensus Estimate for mortgage banking revenues is pegged at $739 million, down 5.6% sequentially.

High Expenses: Wells Fargo might have recorded escalated costs, given its franchise investments in areas, including mobile-banking technology, digital lending and brokerage offerings. Additionally, ongoing litigation hassles might have resulted in elevated legal costs in the quarter to be reported. Notably, management expects seasonally higher personnel expenses in the quarter.

Now, let’s have a look at what our quantitative model predicts:

Our proven model shows that Wells Fargo does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is -17.07%.

Zacks Rank: The company currently carries a Zacks Rank of 5 (Strong Sell), which decreases the predictive power of ESP.

The Zacks Consensus Estimate for the soon-to-be-reported quarter’s earnings moved 9.7% south, over the last seven days. The figure calls for a year-over-year decline of 45.8%. The Zacks Consensus Estimate for sales is projected at $19.5 billion, down 9.9% year over year.

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company price-eps-surprise | Wells Fargo & Company Quote

Stocks That Warrant a Look

Here are a few stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

BCB Bancorp, Inc. (NJ) BCBP is expected to release results on Apr 16. The company has an Earnings ESP of +4.17% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SB ONE BANCORP SBBX is likely to release earnings figures on Apr 28. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +1.56%.

The Earnings ESP for Carolina Financial Corporation CARO is +1.43% and the stock carries a Zacks Rank of 3, currently. The company is expected to report quarterly numbers on Apr 22.

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