Wells Fargo & Company (WFC Quick QuoteWFC - Free Report) is scheduled to report fourth-quarter 2016 results on Jan 13.

The San Francisco-based banking giant has been much in the news following the sales scam that came into light last quarter. The bank has been subjected to severe political and public outrage and has faced several lawsuits and investigations as well.

The year 2016 seems to have dealt another blow to Wells Fargo. The bank has been grappling with restrictions imposed by the U.S. regulators as it failed to “adequately remedy” deficiencies in its resolution plan, better known as “living will”. Notably, this was the second time in 2016 that Wells Fargo failed the “living will” assessment.

By Mar 31, 2017, Wells Fargo is required to file a revised submission, addressing the shortcomings. However, if it fails to address the deficiencies, the regulators will limit the size of the company’s non-bank and broker-dealer assets. Further, if Wells Fargo fails to take care of the deficiencies within two years, the regulators may force the company to divest certain assets or operations.

Amid such adversities, shares of Wells Fargo gained just 9% over the past one year, significantly lagging the Zacks categorized Banks – Major Regional industry’s 31.5% growth.

Will the upcoming earnings release exert more pressure on the stock? Notably, Wells Fargo delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 0.5%. However, our quantitative model doesn’t call for an earnings beat this time around. Also, the Zacks Consensus Estimate of $1.00 per share for the fourth quarter indicates a year-over-year decline of more than 2.5%.
 

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company Price and EPS Surprise | Wells Fargo & Company Quote

A stock needs to have the right combination of the two key criteria – a positive Earnings ESPand a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing the odds of an earnings beat.

Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Wells Fargo is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.00. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Wells Fargo’s Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Factors to Influence Q4 Results

Mortgage Business Momentum Solid:  Wells Fargo – one of the largest mortgage lenders in the nation – is positioned to see growth in its mortgage banking revenues. Management expects mortgage origination volume to increase in the fourth quarter on a year-over-year basis but decline sequentially due to seasonality in the purchase market. Further, the production margin in the quarter is expected to be at or above the upper end of the range of the past five quarters (188 basis points).

Pressure on Net Interest Margin (NIM) Might Ease: Though the persistently low rate environment has taken a toll on the bank’s margins over the past several quarters, the recent Fed interest rate hike might bring about an improvement in NIM.

Expenses May Trend Higher: After the finalization of the FDIC rule, the company estimates surcharge, along with the previously approved base rate reduction, to drive the total FDIC assessment by about $100 million per quarter, which started in third-quarter 2016. Moreover, the bank may record increased costs given its franchise investments in areas, including mobile banking technology, digital lending, brokerage offerings and regulation and compliance.

Retail Banking: Amid troubled times for Wells Fargo, following the bank’s $190-million settlement in Sep 2016 to resolve regulators’ claims of illegally opening millions of unauthorized accounts, the U.S. lender recorded disappointing retail banking customer activity through the quarter. Therefore, this might impact the bank’s operational results.

Muted Loan Growth: According to recent data from the Federal Reserve, overall loan growth is estimated in the 0.5%–0.7% range for the fourth quarter, impacted by election and monetary policy uncertainties. While overall loan growth is anticipated to be slow for the quarter, consumer lending is likely to be comparatively stronger, driven by credit card and automobile loan growth. As expanding loans was one of the major ways to offset margin pressure for major banks including Wells Fargo in the last few quarters, fourth-quarter results might reflect considerable revenue pressure.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model they have the right combination of elements to post an earnings beat this quarter.

BB&T Corporation has an earnings ESP of +1.37% and a Zacks Rank #2. It is scheduled to report fourth-quarter results on Jan 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

The earnings ESP for Citigroup Inc. (C Quick QuoteC - Free Report) is +3.60% and it carries a Zacks Rank #2. The company is scheduled to release fourth-quarter results on Jan 18.

The PNC Financial Services Group, Inc. (PNC Quick QuotePNC - Free Report) has an earnings ESP of +1.61% and a Zacks Rank #2. It is slated to report fourth-quarter results on Jan 13.

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