Uptick In Mortgage Banking Revenues Likely To Be The Lone Bright Spot In Wells Fargo’s Q2 Results

by Trefis Team
Wells Fargo & Co.
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Wells Fargo (NYSE: WFC) will release its Q2 2019 earnings on Tuesday, 16th July. With the period being a overall slow period for the U.S. banking industry, and keeping in mind the Fed’s growth restriction for the banking giant, we expect the bank’s revenues to have shrunk year-on-year. However, the bank’s efforts to cut costs over recent quarters coupled with the billions of dollars it has spent to repurchase its shares should translate into a sizable jump in EPS.

Per Trefis, Wells Fargo’s stock has a fair value of $57, which is 20% higher than the current market price. We have analyzed Wells Fargo’s revenues & expenses over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on Wells Fargo’s valuation. Additionally, you can see more Trefis data for financial services companies here.

A Quick Look At Wells Fargo’s Sources of Revenue

Wells Fargo’s Revenues are divided into 4 segments ($86.4 billion in 2018)

  • Community Banking $41.3 billion in 2018 (48% of Total Revenues) This segment provides banking services for consumers and small business, which include checking and savings accounts, credit and debit cards, as well as automobile, student, mortgage, home equity and small business loans.
  • Wholesale Banking $26.5 billion in 2018 (31% of Total Revenues) This segment includes services like Commercial Lending (e.g. commercial loans, letter of credit, asset-based lending, lease financing) and Securities Trading & Investment Banking
  • Wealth and Investment Management $16.4 billion (19% of Total Revenues) this division represents non-interest income earned by providing asset management, investment, retirement and brokerage services to customers.
  • Insurance & Other$2.2 billion (2% of Total Revenues) It consists of non-interest income earned by providing insurance & other services like operating leases to customers.

How Have Wells Fargo’s Revenues & Expenses Changed Over Recent Quarters?

  • In Q1 2019, Total Revenues ($21.6B) decreased by 1.5% y-o-y due to a drop in Non-Interest Income (4%), partially offset by marginal growth in Net Interest Income by 1%.
  • Non-Interest Expenses reduced by 7% y-o-y in Q1 2019 driven by operational efficiency measures which lead to an overall reduction of 3% in Total Expenses as compared to previous year

Wells Fargo’s Key Revenue & Expense Drivers

Net Interest Income – Wells Fargo’s net interest income forms a majority of the bank’s Community Banking as well as Wholesale Banking revenues. This core revenue stream has been under pressure over several quarters now due to the Fed’s enforcement order forcing the bank to cap its balance sheet. There was a sequential decline of 3% in Wells Fargo’s Net Interest Income in Q1 despite the Fed’s rate hike in December. As we expect the Fed’s enforcement order to remain in place over 2019, the Net Interest Income figure for the year should remain largely unchanged compared to the figure for 2018.

Mortgage Banking Fees – Wells Fargo’s mortgage banking division (which is a part of Community Banking) bore the brunt of the slowdown in the mortgage industry for several consecutive quarters. The cornerstone mortgage business saw revenues fall 24% year-on-year in Q1. However, the U.S. mortgage industry showed signs of having turned the corner in Q2, as a reduction in mortgage rates led to an increase in mortgage refinancing activity. This development can be attributed to the fact that the Fed’s rate hike process came to an end in December (with a potential rate cut on the cards).

Non-Interest Expenses – With the Fed’s enforcement order severely limiting Wells Fargo’s growth opportunities, the banking giant has focused on cutting costs to offset revenue headwinds and to boost its bottom line. Non-interest expenses were only 64.4% of revenues in Q1 2019, as opposed to 68.5% a year ago. We expect the bank to continue to keep costs in check over subsequent quarters, which should have a positive impact on earnings for the year.

Wells Fargo’s Outlook For Full Year 2019

  • We expect Wells Fargo to report $85.7 billion in Total Revenues for 2019, which is 1% lower than the figure for 2018.
  • Wealth & Investment Management revenues are expected to decrease by 8% y-o-y, partially offset by growth in revenues for the Community Banking (1%), Wholesale Banking (1%) and Insurance & Other (2%) segments.
  • Wells Fargo is expected to have repurchased $3.8 billion worth of shares in second quarter. We expect the same trend to continue in subsequent quarters and help its EPS figure reach $4.61 for FY 2019.
  • EPS of $4.61 coupled with our forward P/E multiple of 12.4x represents a price estimate of $57 for Wells Fargo’s stock – a figure 20% ahead of the current market price.

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