Wells Fargo (WFC) Down 20.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Wells Fargo (WFC). Shares have lost about 20.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Wells Fargo due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Wells Fargo Q1 Earnings Miss Estimates, Provisions Rise on Coronavirus

Wells Fargo reported first-quarter 2020 earnings of 1 cent per share, including a reserve build of $3.1 billion and certain other items amid coronavirus scare. The Zacks Consensus Estimate for the same was pegged at 22 cents.

Results include reserve build and an impairment of securities impact of 73 cents, resulting from the economic and market conditions, along with an impact of 6 cents per share from the redemption of Series K Preferred Stock. The prior-year quarter’s earnings were $1.20 per share.

Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and reduced gains on trading activities were major drags.

Provisions also soared on the coronavirus crisis during the reported quarter. However, lower non-interest expenses acted as a tailwind. Further, escalation in loans and deposits reflect a strong capital position.

Including certain adjustments, net income came in at $0.65 billion compared with the $5.9 billion recorded in the prior-year quarter.

The quarter’s total revenues came in at $17.7 billion, lagging the Zacks Consensus Estimate of $19.3 billion. The revenue figure, however, came in lower than the year-ago quarter’s $21.6 billion.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments was mixed. The Community Banking segment’s total quarterly revenues slipped 19.5% and Wholesale Banking revenues were down 18.3%. Further, revenues in the Wealth and Investment Management unit fell 9.8%.

Net Interest and Fee Income Fall, Costs Down

Wells Fargo’s net interest income in the first quarter came in at $11.3 billion, down 8% year on year. Lower interest income mainly resulted in this downside, partly offset by decreased interest expenses. Furthermore, net interest margin shrunk 33 basis points (bps) year over year to 2.58%.

Non-interest income at Wells Fargo came in at $6.4 billion, plunging 31% year over year, primarily due to fall in card fees, other fees, insurance, net gains from trading activities, lease income, other income and mortgage banking revenues. These declines were partly muted by higher revenues from service charges on deposit accounts, net gains on debt securities, and trust and investment fees. Notably, net losses from equity securities were recorded.

As of Mar 31, 2020, total loans were $1.01 trillion, up 5% sequentially. Higher commercial loans were partly offset by lower consumer loans. Total deposits came in at $1.38 trillion, up 4% from the prior quarter.

Non-interest expense at Wells Fargo was around $13 billion during the January-March quarter, down 6% from the year-earlier period. This decline primarily resulted from lower commission and incentive compensation, employee benefits, core deposit and other intangibles, along with FDIC and other deposit assessments. Salaries and other expenses, however, were on the higher side.

The company’s efficiency ratio of 73.6% came in above the 64.4% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality: A Mixed Bag

Wells Fargo’s credit quality metrics was a mixed bag during the March-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $12 billion as of Mar 31, 2020, up 11.1% year over year.

Net charge-offs were $909 million or 0.38% of average loans in the reported quarter, up 30.8% from the year-ago quarter’s net charge-offs of $695 million (0.30%). Non-performing assets dropped 12.3% to $6.4 billion in the first quarter from the $7.3 billion reported in the year-earlier quarter. Notably, provision for credit losses was $4 billion compared with the prior-year quarter’s $845 million.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. During the January-March period, the company bought back 75.4 million shares of its common stock. Notably, the company has temporarily suspended share buybacks through the second quarter of 2020, following the “unprecedented challenge” from the coronavirus pandemic.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $134.7 billion from the $148.1 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.7% under Basel III (fully phased-in) as of Mar 31, 2020, down from the year-earlier quarter’s 11.9%.

Book value per share advanced to $39.71 from the $39.01 recorded in the comparable period last year.

Return on assets was 0.13%, down from the prior-year quarter’s 1.26%. Return on equity was 0.10%, down from the year-ago quarter’s 12.71%.

As of Mar 31, 2020, eligible external total loss absorbing capacity (TLAC) as a percentage of total risk-weighted assets was 23.2% compared with the minimum requirement of 22.0%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month. The consensus estimate has shifted -38.53% due to these changes.

VGM Scores

Currently, Wells Fargo has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Wells Fargo has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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