Earnings Review: Wells Fargo & Company Q3 2017

• Wells Fargo beat on earnings by a slight margin and missed on revenue by a mile.
• This quarter was terrible and was a classic kitchen sink job by management as they expensed a lot of costs towards fines & litigation.
• The bank is still suffering the fake account scandal from politicians and the stock will be in purgatory for a while.

The financials kicked off third-quarter earnings with really high expectations given how many financial stocks have up in recent weeks. The Financial Select Sector SPDR ETF (XLF) which tracks the financial sector is up more than 10% since Labor Day. This is mainly due to the likes of Bank of America, PNC Financial, Goldman Sachs, and JPMorgan Chase. Meanwhile, scandal-ridden Wells Fargo has been stuck in a trading range between $50–55/share for the past six months.

Wells Fargo is still hampered by the fake account scandal and given the political rhetoric from Elizabeth Warren that news is not going away anytime soon. The bank reported its Q3 2017 results and it beat on earnings by a small margin but missed terribly on revenues. Wells Fargo reported earnings of $1.04/share versus analyst expectations of $1.03/share. The bank missed on revenue by a huge margin as it generated $21.92 billion versus analyst expectations of $22.39 billion. The reported negative year-over-year revenue growth of 1.8% while the likes of Citi and JPM are actually growing revenue.

I was really not expecting much from this quarter from Wells Fargo given the scandal overhang. I thought the bank would beat on earnings but have flat revenue growth given slow loan growth in the automobile and housing markets. I estimated that Wells Fargo would earn $1.05/share and generate $22.2 billion on Estimize. Looking at the revenue, the miss was mainly attributed to the net charge offs the bank took on its loan portfolio. Wells Fargo had charge-offs of $717 million (0.3% of loans), up from $655 million (0.27% of loans) in the second quarter. Also, the net-charge offs number is a bit higher due to increased loan losses from the hurricanes in Texas and Florida.

The bank generated a net interest income of $12.5 billion and the net interest margin was disappointing at 2.87%(down 3 basis points from Q2) because of poor loan growth. The bank’s loan portfolio current loan portfolio is $951.9 billion versus $956.9 billion in Q2. Non-interest income also came in lower for the bank down by $200 million from the previous quarter at $9.5 billion. To top off the bad quarter, management reported higher expenses which include a $1 billion charge for potential litigation & fines. Given the political rhetoric from Congress about the fake account scandal, I think Wells Fargo will be getting additional fines and penalties from the CFPB or the Federal Reserve.

The only bright spots which came from this earnings report were that deposits were up and digital banking is doing well. Management reiterated that it’s on track with its $2 billion cost reduction program which ends in 2018. Management returned $4 billion back to shareholders through share buybacks and increased its quarterly dividend to $0.39/share from $0.38/share.

Grade: C-

Overall, this was a classic kitchen sink quarter from management in which it put additional costs from the fake account scandal. The new CEO is really trying to wipe the slate clean from all the controversy. Wells Fargo’s stock is going through a re-rating since the bank used to have a premium added to its valuation because it used to be considered a “clean” bank given how it did not suffer a lot from the 2008 financial crisis and was not the main actor in that crisis. The stock is still stuck in a trading range between $50 and 55. In the long run, Wells Fargo is going to benefit from deregulation from the Trump administration and from future interest rate hikes from the Federal Reserve. Below $50 Wells Fargo stock is a buy for me because on a valuation basis. The credit quality on the loan portfolio is still good.

Estimates: Earnings-$1.05/share and Revenue- $22.2billion (Ranking of 19/102 on Estimize).

Disclosure: Cresco Investments has a position in Wells Fargo (Stock Ticker: WFC)

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.