Wells Fargo (WFC) Q3 Earnings Beat, Provisions & Mortgage Hurt

Zacks Equity Research

October 14, 2022 at 9:57 AM·5 min read

Wells Fargo’s WFC third-quarter 2022 adjusted earnings per share of $1.30 outpaced the Zacks Consensus Estimate of $1.09. Results excluded a $2 billion or 45 cents per share of charges related to a number of “historical matters, including litigation, customer remediation, and regulatory matters.”

Shares of WFC have gained 1.7% in pre-market trading on better-than-expected quarterly performance. Robust net interest income (NII) growth expectations this year (management projecting a 24% jump in NII, up from the prior target of 20%) also led to a bullish stance. However, macroeconomic concerns and disappointing mortgage loan originations (crumbling 59% year over year) seem to be weighing on investor sentiments to some extent.

Results benefited from higher NII, rising rates and solid average loan growth. Yet, dismal non-interest income, higher provisions and weakness in the mortgage business were the major undermining factors. Also, the rise in non-interest expenses acted as a headwind.

The company CEO, Charlie Scharf, noted, “We are closely monitoring risks related to the continued impact of high inflation and increasing interest rates, as well as the broader geopolitical risks, and while we do expect to see continued increases in delinquencies and ultimately credit losses, the timing remains unclear.”

After considering the above-mentioned charges, net income came in at $3.53 billion or 85 cents per share, down from $5.12 billion or $1.17 per share in the prior-year quarter.

NII Up on Higher Rates & Loans, Costs Rise

Total revenues came in at $19.51 billion, surpassing the Zacks Consensus Estimate of $18.72 billion. Also, the top line grew 4% from the year-ago quarter.

Wells Fargo’s NII came in at $12.1 billion, surging 36%. The increase was mainly driven by a rise in interest rates, higher loan balances and lower mortgage-backed securities premium amortization. This was partly offset by lower interest income from loans purchased from securitization pools and Paycheck Protection Program (PPP) loans.

Also, the net interest margin (on a taxable-equivalent basis) increased 80 basis points to 2.83%.

Non-interest income tanked 25% to $7.4 billion. This was largely due to lower mortgage banking income and investment banking (IB) fees. Also, weak results in its affiliated venture capital and private equity businesses and the impact of divestitures hurt fee income. These were partly offset by robust Markets business performance.

Non-interest expenses were $14.3 billion, up 8% year over year. The rise was mainly due to above-mentioned one-time charges. This was partially offset by a fall in revenue-related compensation and the impact of business divestitures and efficiency initiatives.

WFC’s efficiency ratio of 73% was higher than 71% recorded in the year-ago quarter. An increase in the efficiency ratio indicates a deterioration in profitability.

As of Sep 30, 2022, average loans were $945.5 billion, growing 2% sequentially. Average deposits came in at $1.41 trillion, down 3%.

Credit Quality Worsening

The provision for credit losses was $784 million against a provision benefit of $1.40 billion in the prior-year quarter. This was mainly due to higher loan balances and “a less favorable economic environment.”

Net charge-offs were $399 million or 0.17% of average loans in the reported quarter, up from $257 million or 0.12% a year ago. However, non-performing assets decreased 20% to $5.7 billion.

Capital & Profitability Ratios Deteriorate

As of Sep 30, 2022, Tier 1 common equity ratio was 10.3% under Basel III (fully phased-in), down from 11.6% in the corresponding period of 2021.

Return on assets was 0.74%, down from the prior-year quarter’s 1.04%. Return on equity was 8%, down from the year-ago quarter’s 11.1%.

Our Take

Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. Also, the company is working on its strategic initiatives, which will likely help regain the confidence of its clients and shareholders. Improving loan demand, rise in interest rates and manageable expense levels are encouraging.

Despite a rise in loan demand, WFC is likely to face challenges in improving revenues, given the tough operating backdrop due to macroeconomic and geopolitical concerns.

Wells Fargo & Company Price, Consensus and EPS Surprise

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

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Dates & Expectations of Other Major Banks

Bank of America BAC is scheduled to announce third-quarter 2022 numbers on Oct 17.

Over the past week, the Zacks Consensus Estimate for BAC’s quarterly earnings has moved 1.3% south to 79 cents, implying a 7.1% decline from the prior-year reported number.

Truist Financial TFC is slated to report third-quarter 2022 results on Oct 18.

Over the past seven days, the Zacks Consensus Estimate for Truist Financial’s quarterly earnings has moved almost 1% lower to $1.26. This indicates an 11.3% plunge from the prior-year quarter.

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