Wells Fargo May Report Q1 Earnings Miss Due To Headwinds On Multiple Fronts

Wells Fargo (NYSE:WFC) is scheduled to report its performance figures for the first quarter on Friday, April 13. We expect the U.S. banking giant to report earnings of about $1 per share on revenues of $22 billion for the quarter, based on our detailed interactive model for Wells Fargo’s revenues and expenses for the quarter. This compares to consensus estimates of $1.07 for Wells Fargo’s EPS and $21.8 billion for its revenues – indicating an earnings miss for the troubled bank. The three key trends that contribute to our forecast results are the impact of the Fed’s growth restrictions across its operations (especially its interest income), depressed mortgage banking fees from weak mortgage origination activity, and elevated operating expenses from legal provisions.

The Q1 earnings miss does not take away from the fact that the bank’s shares still currently look fairly undervalued. We maintain a $60 price estimate for Wells Fargo’s stock, which is about 10% ahead of the current market price.

Key Expectation #1: Fed’s Growth Restrictions Will Have A Noticeable Impact Across Operations

In early February, the Federal Reserve passed an enforcement order against Wells Fargo prohibiting the banking giant from growing any larger until it has satisfactorily resolved its internal governance issues. This meant that the bank would have to accommodate growth in core loans and deposits without letting its balance sheet swell in size – something that could cost the bank between $300-$400 million in profits this year.

The single biggest impact of the enforcement order on Wells Fargo’s Q1 results is that its interest-earning assets likely stagnated – undermining the strong positive impact the Fed’s ongoing rate hike process would have otherwise had on its top line. It should also be noted here that the first quarter of a year is seasonally a slow period for retail and commercial banking, which would have put pressure on interest-earning assets anyway.

In addition to dragging down the net interest income figure, the Fed’s order is also expected to have had a negative impact on Wells Fargo’s commercial banking fees, investment banking fees as well as securities trading revenues in Q1.

Key Expectation #2: Depressed Activity Levels In Mortgage Industry Will Weigh On Origination Fees

Wells Fargo’s business model focuses considerably on the mortgage industry, with the bank making a sizable chunk of its net interest revenues from residential mortgages in addition to generating fees from originating and servicing mortgages. However, the weak level of activity in the U.S. mortgage industry over the last few quarters has weighed on its top line. This is unlikely to have changed in Q1, as data compiled by the Mortgage Bankers Association (MBA) shows that total mortgage origination volumes fell from an already low $361 billion in Q1 2017 to $346 billion in Q1 2018.

We expect this to put pressure on Wells Fargo’s mortgage origination fees, as well as the interest income from its total mortgage portfolio.

Key Expectation #3: Ongoing Investigations To Result In One-Time Charges As The Bank Increases Legal Provisions

Wells Fargo has been under investigation by several federal and state regulators since September 2016, when it was revealed that its employees fraudulently opened millions of accounts. Since then, these agencies have also been investigating other improper practices by some employees, including making unsuitable mortgage modifications, selling unwanted auto insurance, improperly charging fees for locking in mortgage rates, and adding chargeable add-ons to accounts without the customers’ permission. More recently, the probe spread over to Wells Fargo’s wealth management unit. Additionally, the CFPB is seeking a record fine of $1 billion from the bank for these misgivings. Both these developments would have forced the bank to set aside millions of dollars in additional legal provisions – something we believe will eat into profits for Q1 (as was also seen in Q4 2017).

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Research
Like our charts? Explore example interactive dashboards and create your own