Wells Fargo (NYSE: WFC) is scheduled to report its fiscal Q3 2021 results on Thursday, October 14. We expect Wells Fargo to report mixed results, with revenues just ahead of the consensus estimates and earnings missing the mark. The bank reported better than expected results in the last quarter. It posted a 14% y-o-y growth in its top line, mainly driven by a 37% increase in the non-interest income, partially offset by lower net interest income (NII). That said, WFC’s adjusted net income improved to $5.7 billion in the quarter, a major jump from -$2.7 billion in the year-ago period, primarily driven by higher revenues and a favorable decrease in provision for credit losses. We expect the same trend to continue in the third quarter, as well.
Our forecast indicates that Wells Fargo’s valuation is $49 per share, which is 4% above the current market price of close to $47. Our interactive dashboard analysis on Wells Fargo’s Earnings Preview has more details.
(1) Revenues expected to edge past the consensus estimates
Wells Fargo’s revenues for full-year 2020 were $72.3 billion – down 15% y-o-y, mainly driven by a 16% decrease in net interest income (NII), followed by a 14% drop in the non-interest revenues.
- The company generates more than 55% of its revenues from NII, which suffered in 2020 due to interest rate headwinds and lower outstanding loan balances. While the interest rates were down due to the zero-rate policy of the Fed in response to the Covid-19 crisis, the loan balances struggled due to lower consumer demand and higher loan prepayment levels. The NII continued the same trend in the first and second quarter of 2021, reporting a decline of 22% and 11% on a year-on-year basis, respectively. That said, consumer demand has seen some recovery over the recent months and we expect the bank to report some growth in outstanding loans. However, low-interest rates are unlikely to see a swift revival to the pre-Covid-19 levels. Overall, the NII is unlikely to see growth in the third quarter.
- The firm reported a non-interest income of $32.5 billion in 2020 – 14% below the year-ago period. This was mainly due to negative growth in card income, mortgage servicing income, service charges on deposit accounts, net gains from equity investments, etc. The trend reversed in 2021, with WFC posting 45% y-o-y and 44% growth in the first and second quarters, respectively. It was primarily because of higher card fees, mortgage banking revenues, and net gains from equity investments. We expect the same momentum to continue in the third quarter.
- Overall, we expect Wells Fargo’s revenues to remain around $72.1 billion for FY2021.
Trefis estimates Wells Fargo’s fiscal Q3 2021 revenues to be around $18.47 billion, marginally above the $18.37 billion consensus estimate. We expect the growth in non-interest revenues to drive the third-quarter results.
Moving forward, the interest rates are likely to remain low for some more time, hurting the NII. While outstanding loan balances will likely benefit from a recovery in consumer demand, the near-term prospects for NII are not bright. That said, the non-interest income is expected to drive the top-line. Our dashboard on Wells Fargo’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to miss the consensus estimates
Wells Fargo Q3 2021 adjusted earnings per share (EPS) is expected to be $0.83 per Trefis analysis, almost 15% below the consensus estimate of $0.98. The bank’s earnings decreased from $4.08 to $0.42 in 2020, mainly due to lower revenues and significant build-up in provisions for credit losses. The numbers improved in the first and the second quarter, due to lower provisions for credit losses – provisions were down to -$1.3 billion in Q2 from $9.5 billion in the year-ago period. We expect the same trend to continue in the third quarter.
Going forward, we expect WFC’s net income margin to improve in the current year, leading to an adjusted net income of $13.1 billion – up from $1.7 billion in 2020. This will enable the bank to report an EPS of $3.40.
(3) Stock price estimate 4% higher than the current market price
We arrive at Wells Fargo’s valuation, using an EPS estimate of around $3.40 and a P/E multiple of just above 14x in fiscal 2021. This translates into a price of $49, which is 4% above the current market price of around $47.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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