It has been about a month since the last earnings report for Wells Fargo & Company WFC. Shares have added about 3.7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is WFC due for a pullback? 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 Beat, Low Provisions Recorded

Wells Fargo recorded positive earnings surprise of 4.7% in first-quarter 2018. Earnings of $1.12 per share surpassed the Zacks Consensus Estimate of $1.07. Moreover, results improved from the prior-year quarter earnings of $1.03.

Notably, results are preliminary which might be impacted on resolution of matters with Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) related to the bank’s compliance risk-management program with a charge of $1 billion in civil money penalties.

Lower provisions and higher interest income aided results. However, elevated interest expense and reduced non-interest income, with lower mortgage revenues, were the undermining factors. Moreover, expenses soared. Further, reduction in loans and deposits acted as headwinds for the quarter.

The quarter’s total revenues were $21.9 billion, outpacing the Zacks Consensus Estimate of $21.7 billion. However, the figure compared unfavorably with the prior-year quarter tally of $22.3 billion.

Furthermore, on a year-over-year basis, quarterly revenue generation at the business segments was mixed. Community Banking segment’s total quarterly revenues increased slightly, while Wholesale Banking revenues were down around 3.9%, and revenues for the Wealth and Investment Management unit edged down moderately.

Loans, Non-Interest & Interest Income Fall, Costs Escalate

Wells Fargo’s net interest income in the quarter came in at $12.2 billion, down 1% year over year. Increased interest income from debt securities, loans held for sale, loans, equity securities, along with higher other interest income, were mostly offset by higher interest expense. Further, net interest margin contracted 3 basis points (bps) year over year to 2.84%.

Non-interest income at Wells Fargo came in at around $9.7 billion, down 2% year over year, primarily due to fall in almost all components of income, partly offset by net gains from equity securities and higher other income.

As of Mar 31, 2018, total loans were $947.3 billion, down around 1.2% year over year. Reduction in consumer as well as commercial loan portfolio was recorded. Total deposits were $1.3 trillion, down 2.3% from the prior-year quarter.

Non-interest expense at Wells Fargo was $14.2 billion, up 3% from the year-earlier quarter. The upsurge in expenses primarily stemmed from a rise in salaries and commission, and incentive compensation, along with elevated other expenses. Nonetheless, Wells Fargo remains committed to achieve expense reduction of $4 billion by the end of 2019.

The company’s efficiency ratio of 64.9% came in above the 62% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality Improved

Wells Fargo’s credit quality metrics improved in the reported quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $11.3 billion as of Mar 31, 2018, down 8.1% year over year.

Provision for credit losses was $191 million, plummeting 68.4% year over year. Net charge-offs were $741 million or 0.32% of average loans in the first quarter, down 8% from the year-ago quarter’s net charge-offs of $805 million (0.34%). Non-performing assets were down 22.4% to $8.3 billion in the quarter under review from $10.7 billion reported in the prior-year quarter.

Strong Capital Position

Wells Fargo has maintained a sturdy capital position. In the recently-reported quarter, the company returned $4 billion to shareholders through common stock dividends and net share repurchases.

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) increased to $153.1 billion from $148.5 billion recorded in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 12% under Basel III (fully phased-in) as of Mar 31, 2018, compared with 11.2% recorded in the year-earlier quarter.

Book value per share advanced to $37.33 from $35.67 recorded in the comparable period last year.

Outlook

According to management, growth in net interest income for 2018 will depend on a variety of factors, including the level and of slope of the yield curve, as well as deposit betas and earning asset growth trends.

During the extended period of low interest rates since the fixed commercial loan swaps entered into, they generated incremental net income of about $3 billion. While the elimination of these swaps will reduce interest income in 2018, it has increased the bank’s asset sensitivity to be slightly above the middle of previously provided guidance of 5-15 bps for a 100-basis-point parallel shift in the yield curve and is expected to improve interest income in future periods as interest rates increase.

Given the current market pricing trends, management expects production margin to decline further in 2Q18.

Management currently projects the full-year 2018 effective income tax rate to be approximately 19%.

Management expects credit card balances to grow due to focus on digital channels and customer engagement.

Based on trends in customer behaviour, Wells Fargo accelerated branch closures in 2016 and closed 84 branches mostly in the second half of the year. Furthermore, management recorded increased pace of branch closures and exceeded 200 branches in 2017, and expects closures at the level of 300 in 2018.

Additionally, on technology advancement and other factors, total branch network is expected to decline to around 5,000 by the end of 2020. Wells Fargo is also reducing properties and other businesses, including standalone mortgage locations which stand by more than 10% in 2017, and transitioning operational activities in auto business from 57 regional banking centers into three larger regional sites. The consolidation is likely to be completed in the first half of 2018.

The bank is on track to achieve the targeted $4 billion of expense reductions. An initial $2 billion of targeted expense savings is expected by year-end 2018, supporting the company’s ongoing investment in the businesses, which includes a number of key areas, such as enhancing the compliance and risk management capability, building a better bank and strengthening core infrastructure.

Management estimates the additional $2-billion targeted annual expense reductions by the end of 2019 to trickle down to the bottom line and be fully recognized in 2020. These projected savings do not include the completion of core deposit intangible amortization expense at the end of 2018, which will amount to $769 million in full-year 2018, and also does not include completion of the FDIC special assessment which is anticipated by the end of 2018. Additionally, expense savings due to business divestitures are excluded.

Management anticipates full-year 2018 total expenses of $53.5-$54.5 billion. This expectation includes approximately $600 million of operating losses in 2018, and excludes any outside litigation and remediation accruals or penalties.

The seasonally higher personnel expenses are expected to drop in 2Q18, though salary expense is likely to flare up.

Further, quarterly efficiency ratio above 59% is estimated by the end of 2018, excluding any outside litigation accruals.

After declining for five consecutive quarters, auto originations have stabilized since the last two quarters. With the completion of the centralization of collection and funding activities, the bank is positioned to start increasing originations over time, and currently expects the portfolio of balances to begin growing in early 2019.

Management expects residential mortgage originations to increase in 2Q18, reflecting seasonality in the purchase market.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to eight lower.

Wells Fargo & Company Price and Consensus

 

Wells Fargo & Company Price and Consensus | Wells Fargo & Company Quote

VGM Scores

At this time, WFC has a poor Growth Score of F and a grade with the same score on the momentum front. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

The company’s stock is suitable solely for value based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, WFC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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