Wells Fargo’s Investment Banking Fees Should Make Up For Shrinking Interest Margins In Q1
Earnings season for banks kicks off on Tuesday, April 14, with Wells Fargo (NYSE:WFC) reporting its first quarter results before the market opens. While Wells Fargo’s results will provide investors with a good idea of what to expect from retail-focused banks for the period, the expectations for the more diversified banking giants will be set by JPMorgan’s (NYSE:JPM) earnings release on the same day. That said, Wells Fargo’s performance figures will provide some invaluable insight into the growth of different loan portfolios (especially mortgages and commercial loans) for the banking industry as a whole over the period.
Coming to the expected quarterly performance, Wells Fargo is likely to post record earnings this quarter – comfortably surpassing the strong performance numbers it churned out in Q1 2014. While it is no secret that the bank has struggled over the last few years to counter the impact of shrinking net interest margins and declining mortgage origination figures on its bottom line, it has done well to ramp up its fee-based revenue streams. The bank’s asset management arm has done quite to help maintain its top-line figures over recent quarters, and we expect it to do so yet again in Q1 2015. Moreover, we expect the banking giant to report record fees from its investment banking services this time around – making the period one of the most profitable one for Wells Fargo in its history.
We maintain a $57 price estimate for Wells Fargo’s stock, which is about 5% ahead of its current market price.
See our complete analysis of Wells Fargo here
Net Interest Margins Unlikely To Improve Until Late 2015
As we have pointed out on numerous occasions in the past, Wells Fargo’s biggest concern is its rapidly shrinking net interest margin (NIM) figure. While the current prolonged low-interest rate environment has impacted interest incomes for the banking industry as a whole, the impact on Wells Fargo is aggravated due to its reliance on the traditional loans-and-deposits banking model.
The chart below summarizes Wells Fargo’s reported net NIM figures for each quarter since early 2005.
The steady decline in Wells Fargo’s NIM figures over the last decade stands out clearly from the chart above. This reduction has been particularly sharp since early 2012, when the NIM figure was just under 4%. It has fallen 87 basis points (0.87%) over the last ten quarters. Wells Fargo has been able to maintain its net interest revenues at around $11 billion throughout this period only thanks to a steady increase in its interest-earnings assets. As the Federal Reserve is unlikely to hike benchmark rates until the second half of the year, margins are expected to remain under pressure over the next couple of quarters too.
You can better understand the partial impact of changing net interest margins on the bank’s total value by making changes to the chart below, which represents Wells Fargo’s NIM on outstanding mortgages.
Investment Banking Fees Likely To Reach Unprecedented Levels
Once an insignificant part of Wells Fargo’s business model, investment banking operations grew substantially in early 2009 when the bank acquired Wachovia. Since then, the bank has focused its efforts on growing this unit – the positive impact on which will be evident in the bank’s results for this quarter. In Q4 2014, the bank reported investment banking fees of $521 million – only the second time since its acquisition of Wachovia that it had churned out more than half a billion dollars in these revenues (the other being Q2 2013). We believe that this figure could very well cross $750 million for Q1 2015.
The reason for this is the particularly strong performance by Wells Fargo’s M&A advisory, equity underwriting as well as debt origination desks this quarter as detailed by Thomson Reuters’ quarterly investment banking league tables. Wells Fargo ranked #14 globally in Q1 2015 in terms of completed M&A deals – up from #40 in Q1 2014 – and was a part of deals worth $26.4 billion that went through over the period. ((Global M&A Financial Advisory Q1 2015, Thomson Reuters Deals Intelligence)) The bank also helped underwrite $6.3 billion in equity for the quarter – almost three-times the $2.2 billion it managed for the year-ago period. [1] Finally, the bank’s global debt origination volumes were at an all-time high of $47.7 billion compared to $26.3 billion in Q1 2014. ((Global Debt Capital Markets Q1 2015, Thomson Reuters Deals Intelligence))
All these factors taken together point to a strong quarter for Wells Fargo in terms of total investment banking fees. You can see how rapid growth in these revenues can boost the bank’s share value by making changes to the chart below.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Global Equity Capital Markets Q1 2015, Thomson Reuters Deals Intelligence [↩]