Wells Fargo Fourth Quarter Earnings Preview (63.29 +0.17)
- WFC is scheduled to report fourth quarter earnings tomorrow before the open. There is a conference call scheduled for 10:00 AM ET (the company typically does not provide EPS or revenue guidance).
- Q4 Capital IQ consensus calls for EPS of $1.03 (versus $1.04 last quarter) on revenue of $22.64 billion (+3.2% QoQ).
- Aside from banking peers, C, BAC, USB, PNC, names to watch in the homebuilder space include: HOV, SPF, RYL, BZH, LEN, PHM, TOL, KBH, MDC, DHI, TPH, MTH, MHO. Finally, MSR names include: WAC, OCN, NSM.
- With 97% of its revenue coming from the U.S., WFC is viewed as a great read on the pulse of the American economy. Investors will be paying close attention to the banks mortgage business.
- Following passage of the tax reform law, investors will be looking toward banks such as WFC for any potential financial impacts. Deferred Tax Assets will be impacted by the change in tax laws. Some banks are already providing guidance on the topic with losses ranging from $1.25-$16 billion. WFC did not yet report what its impacts will be.
- A Deferred Tax Asset refers to a situation where a company has overpaid taxes or paid taxes in advance on its balance sheet. Eventually these taxes are returned to the company but when the tax rate is lowered the value of the DTA is reduced. The reason why the banks have such high DTAs dates to the financial crisis when the group experienced massive losses.
Key Points from Last Quarter
- Net interest margin was 2.87 percent, down 3 basis points from second quarter 2017.
- Net interest income in third quarter 2017 was $12.5 billion, in line with second quarter 2017.
- Total average loans were $952.3 billion in the third quarter, down $4.5 billion from the second quarter. Period-end loan balances were $951.9 billion at September 30, 2017, down $5.6 billion from June 30, 2017.
- Mortgage banking noninterest income was $1.0 billion, compared with $1.1 billion in second quarter 2017. Residential mortgage loan originations were $59 billion in the third quarter, up from $56 billion in the second quarter. The production margin on residential held-for-sale mortgage loan originations was 1.24 percent, consistent with the second quarter. Mortgage servicing income was $309 million in the third quarter, down from $400 million in the second quarter, primarily due to higher unreimbursed servicing costs.
- The efficiency ratio was 65.5 percent in third quarter 2017, which included a 456 basis point impact from the $1 billion litigation accrual. At a December Goldman Conference,
- WFC said that it expects efficiency initiatives will reduce expenses by $2 billion annually by year end 2018 and that those savings support our investment in the business.
- Guidance: Co continues to expect decline QoQ in auto loans. Co sees continued decline in personal credit lines. Efficiency ratio was higher than expected due to higher cyber related expenses. Goal is to below 59% on efficiency ratio next year; Q4 efficiency ratio will most likely be in the +/- 61% range.
Analyst Notes
- Barclays said the biggest driver of the 2018 EPS increase is a reduction in the corporate tax rate, in addition to continued federal fund rate hikes. Still, the firm's estimates reflect double-digit EPS growth at the median bank prior to tax reform and over 25% growth with it. They look for continued EPS growth into 2019, assuming the consensus economic and rate forecasts pan out. Based on their revised forecasts, the median bank stock under coverage shows potential upside approaching 20%, plus a dividend yield over 2%. C and JPM stand out, while GS could play some catch-up near-term given it has significantly lagged its peers lately.
Options Activity
- Based on WFC options, the current implied volatility stands at ~ 21%, which is 9% higher than historical volatility (over the past 30 days). Based on the weekly WFC Jan12 $55.5 straddle, the options market is currently pricing in a move of ~2% in either direction by weekly expiration (Friday).
Technical Perspective
- WFC shares have underperformed the S&P over the last 52 weeks with WFC rising by 14% vs 20% gain in the index. WFC tends to have 2-4% reactions to earnings. On a positive report, look for resistance near the $63.30-63.75 area, while support sits near the $62.00-62.25 vicinity.