Back to top

Image: Bigstock

Fee Income Decline to Hurt Wells Fargo's (WFC) Q2 Earnings

Read MoreHide Full Article

Wells Fargo & Company (WFC - Free Report) is slated to announce second-quarter 2022 results, before the opening bell, on Jul 15. The company’s earnings and revenues are expected to have declined year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on higher net interest income (NII), provision benefits, a marginal decline in costs and solid average loan growth. 

Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on all four occasions, the surprise being 23.5%, on average.

Wells Fargo & Company Price and EPS Surprise

 

Wells Fargo & Company Price and EPS Surprise

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

Let’s now look at the other factors that are expected to have influenced Wells Fargo’s second-quarter earnings.

Loans and NII: In the second quarter, lending activity improved sequentially. This is likely to have been a tailwind for Wells Fargo, which is primarily focused on the lending business. Per the Fed’s latest data, there was considerable strength in commercial lending in April and May, backed by commercial and industrial loans, and commercial real estate loans. Residential real estate loans and consumer loans also improved.

However, due to high pay downs and payoffs, interest income from the paycheck protection program (PPP) loans is expected to decline.

In the second quarter, the Fed hiked interest rates by 50 basis points (bps) in May and another 75 bps in June. With this, the level of the policy rate reached 1.5-1.75%, the highest since just before the March 2020 pandemic. Hence, decent loan growth and interest rate hikes are likely to have modestly driven the bank’s NII and net interest margin (NIM) in the quarter.

Amid the considerations, the Zacks Consensus Estimate for Wells Fargo’s NII is pegged at $10.07 billion, suggesting a 9.2% decline from the prior quarter’s reported figure.

Mortgage Banking Revenues: Mortgage originations, both purchase and refinancing, continued to normalize in the second quarter. Mortgage banking revenues have been facing tough comps from the prior year that was propelled by low mortgage rates.

However, in the second quarter, mortgage rates increased. The climb in mortgage rates has been affecting origination volumes. Hence, being the largest bank mortgage lender in the United States, the company is likely to continue seeing declines in its home lending portfolio and mortgage banking income. This, along with lower gains on sale margins, is expected to have affected the company’s mortgage servicing income.

Moreover, at a mid-quarter conference, WFC’s chief financial officer, Mike Santomassimo, noted that the bank’s mortgage income could sequentially fall "close to 50%" in the second quarter.

The Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $520 million for the second quarter, suggesting a 25% decline from the prior quarter’s reported number.

Overall Non-Interest Revenues:Wells Fargo’s investment advisory and other asset-based fee revenues are likely to have borne the brunt of the continued weaker equity market performance in the quarter.

The industry-wide decline in deal-making activity due to fewer companies going public and stock prices plunging, as economic growth slows, affected investment banking revenues. Wells Fargo too is not immune to these changes and is expected to have seen a negative impact on investment banking revenues. Nonetheless, the consensus mark for the same is pegged at $456 million, implying a sequential increase of 2%.

While trading revenues do not comprise a significant part of the company’s business, Wells Fargo expects trading revenues to be up "a little bit over last year.” This is likely to have been supported by increased volumes on higher volatility in all asset classes. The consensus mark for trading revenues is pegged at $190 million, implying a sequential decrease of 12.8%.

In January, the company announced the scrapping of certain overdraft and non-sufficient fund fees by the first-quarter end. Such fee waivers are also expected to have affected fee income growth.

The Zacks Consensus Estimate for Wells Fargo’s total fee income is pegged at $7.73 billion for the second quarter, suggesting a 7.6% fall from the prior quarter’s reported number.

Expenses: Wells Fargo’s costs are expected to have continued to flare up in the second quarter, given its franchise investments in technology and digitalization efforts. Additionally, amid the rising inflation, salary expenses are anticipated to have led to elevated non-interest expenses. This is expected to have hindered bottom-line growth in the second quarter. The company expects operating losses to increase in the second quarter.

Asset Quality:  While WFC has released reserves in several recent quarters, management previously said that in second-quarter 2022, the bank would not release funds set aside to cover potential pandemic-related loan losses. This is expected to have resulted from the uncertainty in the U.S. economy. Markedly, the provision for credit losses was a benefit of $787 million as of Mar 31, 2022,

What Our Model Predicts

Our proven model does not predict an earnings beat for WFC this time around. This is because Wells Fargo does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is -11.31%.

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

The Zacks Consensus Estimate for second-quarter earnings has been revised marginally downward to 84 cents over the past month. Also, it suggests a year-over-year decline of 9.7%.

Also, the consensus estimate of $17.74 billion for quarterly revenues indicates a 12.5% fall from the prior-year quarter’s reported number.

Stocks That Warrant a Look

JPMorgan Chase & Co. (JPM - Free Report) and Truist Financial (TFC - Free Report) are a few stocks that you might want to consider, as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for JPMorgan is +1.32% and the company carries a Zacks Rank #2 (Buy) at present. JPM is slated to report second-quarter 2022 results on Jul 14.

The Zacks Consensus Estimate for JPM’s second-quarter earnings has moved marginally north over the past month.

Truist Financial is scheduled to release second-quarter results on Jul 19. TFC currently has a Zacks Rank #3 and an Earnings ESP of +1.38%.

The Zacks Consensus Estimate for TFC’s second-quarter earnings has been unchanged over the past month.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.


See More Zacks Research for These Tickers


Pick one free report - opportunity may be withdrawn at any time


Wells Fargo & Company (WFC) - free report >>

JPMorgan Chase & Co. (JPM) - free report >>

Truist Financial Corporation (TFC) - free report >>

Published in