Why Wells Fargo Earnings Haven’t Fired Up Investors

Why Wells Fargo Earnings Haven’t Fired Up Investors

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US major bank Wells Fargo has boosted its profit in the second quarter, surprisingly beating analyst estimates. Although the bank continues to struggle with a scandal around fictitious accounts, the net income rose by five percent compared to the previous year to 5.8 billion US dollars (5.1 billion euros). This was announced by the institute on Friday in San Francisco.

The earnings expectations were exceeded but revenue failed to meet their estimate. At $22.2 billion, revenue stagnated year-on-year and missed analysts’ average estimate of $22.47 billion. They blamed weakness in mortgages and wholesale banking for the miss. This has caused investors to be worried, resulting shares to by over two percent on Friday.

CFRA’s Ken Leon said “We raise our 2017 EPS estimate by $0.05 to $4.20 and maintain 2018’s at $4.50 a share. WFC posts Q2 EPS of $1.07, vs. $1.01, $0.08 above the S&P Capital IQ consensus. Total loan growth was up 1% with average loan yield of 4.3%, while deposits were up 5% with increases in all customer segments in Q2. We see WFC benefiting from higher net interest income, up 6% in Q2, for average earnings assets.”

In September, it acknowledged that employees had been setting up unauthorized savings and credit card accounts for years on a large scale.

This was followed by numerous layoffs, a slump in new business as well as heavy penalties from US authorities compared to other problems. But the case has not yet been ended – US regulators continue to investigate. This week, US Fed chair Janet Yellen said the scandal was “monstrous” and raised further sanctions.

Total average deposits recorded an increase of $64.5 billion, or 5 percent to $1.3 trillion, up and total average loans marked growth of 6.1 billion or 1 percent to $956.9 billion. Mortgage banking income experienced a drop of 18 percent to $1.15 billion.

Keefe, Bruyette & Woods’ Brian Kleinhanzl and Michael Brown said “Disappointing Loan Growth, Yet Credit Remains Strong: Sequentially, EOP loans of $957.4B decreased by 0.4% (annualized) well below our estimate as we were calling for Q/Q annualized loan growth of 4.3%, however loan yields did increase sequentially.

WFC released $100 million of reserves this quarter and we were looking for a $131 million reserve build. NCOs were $655 million and this was above our $879 million estimate. The NCO ratio was 0.27% in 2Q17 and this was better versus our 0.37% forecast and prior quarter NCO ratio of 0.38%. Capital Ratios Increase Modestly: WFC’s Basel III Tier 1 Common was 11.6% which was up from 11.3% last quarter. WFC’s TBV increased to $30.64 from $29.40 last quarter and versus our $29.79 estimate. WFC repurchased 43 million shares in the quarter and we were expecting 45 million of share repurchase (53M share repurchase in 1Q17).”

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She is the Managing Editor for in-depth discussions and analysis as well as breaking news at Markets Morning. She works closely with Editor-in-Chief Zac Berry on content and publishing initiatives for the site. Brianna Clemons has worked as a financial journalist and editor since 1997. She lives in Bucks County, PA, with her husband, four young children and one dog.

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