What’s in the Cards for Wells Fargo (WFC) in Q1 Earnings?

Wells Fargo & Company WFC is scheduled to report first-quarter 2024 results on Apr 12, before the opening bell. The company’s quarterly revenues and earnings are expected to have declined year over year.

In the last reported quarter, WFC’s earnings beat the Zacks Consensus Estimate on higher non-interest income. An improvement in capital ratios and a decline in expenses were other positives. However, the decline in net interest income (NII), worsening credit quality and a dip in loan balances were the undermining factors.

Over the trailing four quarters, Wells Fargo’s earnings surpassed the consensus estimate on all four occasions, the average surprise being 9.5%.

Wells Fargo & Company Price and EPS Surprise

Wells Fargo & Company price-eps-surprise | Wells Fargo & Company Quote

Let us take a look at factors that are expected to have influenced Wells Fargo’s first-quarter earnings.

Loans and NII: Banks’ lending activities have likely improved in the first two months of the quarter under review. Particularly, the demand for commercial and industrial loans, and real estate loans, specifically commercial real estate loans, improved slightly from the fourth-quarter 2023 end, per the Fed’s latest data. Moreover, consumer lending showed signs of improvement, likely supported by the Fed hinting at the rate hike pause.

While the reinvestment of securities run-off into higher-yielding assets is expected to have increased net interest income (NII) for WFC, high interest rates (at a 22-year high of 5.25-5.5%) are likely to have affected its lending activity in the quarter under review.

Moreover, WFC is anticipated to have seen lower deposit balances, as customers reallocate cash into higher-yielding alternatives. Also, the company is expected to have seen a continued shift to a higher percentage of interest-bearing deposits. This is anticipated to have increased interest expenses for WFC.

Amid these considerations, the Zacks Consensus Estimate for WFC’s NII is pegged at $12.25 billion, indicating a 4% decline from the prior quarter’s reported figure.

Non-Interest Revenues: The company is likely to have seen higher deposit-related fees. The consensus mark for the same is pegged at $1.26 billion, implying a 5.5% increase sequentially.

In the first quarter, mortgage rates increased, with the rate on a 30-year fixed mortgage rising to 6.79% in March from 6.62% at the start of January. Nonetheless, due to home price appreciation, origination volumes (particularly purchase originations) remained lower than the prior quarter.

Hence, being one of the preeminent bank mortgage lenders in the United States, WFC is likely to have continued seeing declines in its home lending portfolio and mortgage banking income in first-quarter 2024. The Zacks Consensus Estimate for WFC’s first-quarter 2024 mortgage banking revenues is pegged at $202 million, suggesting flat on a sequential basis.

Wells Fargo’s investment advisory and other asset-based fee revenues are likely to have improved from higher market valuations and transactional activities. The consensus mark for investment advisory and other asset-based fee revenues is pegged at $2.27 billion, implying a sequential rise of 5%.

In the quarter under review, the investment banking (IB) business showed a turnaround from the discouraging performance in the past two years. Increase in deal volumes and number of deals indicate buyer confidence. This was supported by the Fed hinting at an end to the hiking rate cycle and the robust stock market.

This is expected to have improved WFC’s IB fees. The Zacks Consensus Estimate for the same is pegged at $467 million, suggesting a 2.6% rise from the prior quarter’s reported number.

The Zacks Consensus Estimate for Wells Fargo’s total non-interest income is pegged at $7.80 billion, implying a 1.3% rise from the prior quarter’s reported number.

Expenses: Wells Fargo’s costs are expected to have continued to flare up in the first quarter, given its franchise investments in technology and digitalization efforts. Additionally, severance expenses related to job cuts are anticipated to have led to elevated non-interest expenses. This is likely to have hindered bottom-line growth in the quarter under review.

Asset Quality: With expectations of an uncertain macroeconomic outlook, Wells Fargo’s credit quality is likely to have deteriorated. Moreover, given the heightened market volatility, commercial loan defaults are expected to have risen. Hence, as WFC has substantial exposure to commercial loans, it is likely to have set aside reserves in the first quarter.

The consensus mark for total non-accrual loans is pegged at $8.80 billion, implying a sequential rise of 6.6%.

What Our Model Predicts

According to our quantitative model, the chances of WFC beating the Zacks Consensus Estimate for earnings this time are low. This is because it does not have the combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.

You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is -2.25%.

Zacks Rank: WFC currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate for first-quarter earnings has been revised 1.8% downward in the past week to $1.08 per share. Also, it suggests a year-over-year decline of 12.2%.

The consensus estimate for quarterly revenues of $20.20 billion indicates a 2.6% decline from the prior-year quarter’s reported number.

Stocks That Warrant a Look

Here are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for Citizens Financial Group, Inc. CFG is +1.33% and it carries a Zacks Rank #3 at present. The company is slated to report first-quarter 2024 results on Apr 17.

Over the past month, CFG’s Zacks Consensus Estimate for quarterly earnings has been unchanged.

Fifth Third Bancorp FITB is scheduled to release first-quarter 2024 earnings on Apr 19. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +2.55%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FITB’s quarterly earnings estimates have been marginally revised upward over the past week.

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