Wells Fargo Beats by a Penny

Earnings season is underway for our Buy List. This morning, our first Buy List earnings report came out. For Q3, Wells Fargo (WFC) earned $1.05 per share which topped Wall Street’s estimate by one penny per share. The bank’s revenue rose to $21.88 billion which beat estimates by $120 million.

Wells Fargo’s loan activity picked up during the quarter. Total loans at the end of the quarter were $903.23 billion, a 7.7% increase from $838.88 billion in the same period a year ago. Commercial and industrial loans, which make up one of the largest parts of the bank’s total portfolio, were $292.23 billion, up 15% from $254.2 billion in the same period last year.

That’s pretty good. The downside is that Wells’s net interest margin came in a tad below 3% which isn’t where I’d like it. The bank has also been squeezed by dud loans to the energy sector. There’s been a lot of careless jabber on Wall Street that large banks are much more vulnerable to bad energy loans than people realize. Truthfully, it’s an issue, but it’s not an earnings killer. Last quarter, Wells didn’t release a dime in loan loss reserves.

Loans to energy companies comprised about 2% of Wells Fargo’s overall portfolio, but the bank said after its second-quarter earnings report that there was a risk of delinquency on $508 million in those balances, or around four times its estimate for the first quarter.

In the third quarter, Wells Fargo set aside $703 million to cover loans that could potentially turn bad in the future. That compares with $368 million in the third quarter of 2014 and $300 million in the second quarter. The bank lost $703 million to loan defaults, or 0.31% of its overall portfolio, compared with a 0.32% charge-off rate in the third quarter a year ago.

More importantly, Wells is profiting from the slowly-recovering consumer.

Overall profits at Wells Fargo’s community banking division, which includes its consumer operations, were $3.69 billion, a 6.5% increase from the $3.46 billion it earned in the third quarter of 2014. Wells Fargo’s wholesale banking division recorded profits of $1.77 billion, down 8.1% from the $1.93 billion it reported in the same quarter last year. The bank’s wealth, brokerage and retirement unit posted profits of $606 million, a 10% increase from the $550 million it earned in the third quarter of 2014.

Costs increased 1.2% to $12.4 billion. Expenses as a share of revenue was 56.7%, within the range of 55% to 59% that Wells Fargo targets for its so-called “efficiency ratio.”

Wells Fargo’s mortgage business, the largest in the U.S. by volume, earned $1.59 billion in fees in the quarter, down 2.7% from the $1.63 billion it earned in same period a year ago. The bank extended $55 billion in home loans between the end of June and the end of September, compared with $48 billion in the third quarter of 2014 and $62 billion in the second quarter of this year.

A large piece of Wells Fargo’s growth strategy this year has involved acquiring assets and businesses that General Electric Co.’s finance arm was shedding as part of the manufacturer’s retreat from banking. Within the past two weeks the bank announced it was acquiring the conglomerate’s railcar leasing and commercial lending and leasing businesses, and earlier this year it purchased $9 billion of GE’s property loans.

Wells started off the year quite well for us, but it’s been lagging the market for the past two months. It’s been especially bad since the market turned towards cyclicals about two weeks ago. This isn’t so much a problem for Wells as it has been for the entire financial sector. The shares are down about 1% this morning, but it’s not something to worry about.

Posted by on October 14th, 2015 at 10:23 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.