Wells Fargo & Co (WFC) Earnings Preview

By Kin Talk on Thursday, October 10, 2013 with 0 comments

Q3 profit is expected to surge on cost cutting, despite sluggish mortgage business

Reserve Releases
A recent uptick in interest rates has seen a decrease in home loans. It will only be greater reserve releases along with cost cuts that will fuel earnings.
An important source of income growth has become sluggish and Wells Fargo is forced to dip into its "releasing reserves” which are generally used to cover bad loans. Interestingly, the move will boost to the bank's bottom line.
After releasing $500 million of reserves in Q2, a $300 million jump over the Q1 reserve release level, the San Francisco-based company guided to a additionally reserve release increase in Q3.
Reserve releases made up 6% of Wells Fargo's Q2 profit. Still, reserve releases are not considered as quality earnings and can make up for lower revenue growth only for so long before the bank has to come up with ways to adjust the difference.
Anyway, more borrowers are paying their loans on time and this means that WFC doesn't need to worry about covering loan losses with more money on hand. 
This will give the bank its 14th straight quarter of EPS growth. Analysts polled by Thomson Reuters are expecting a 10% rise to 97 cents a share in Q3 earnings. Revenue will stay flat at $21.0 billion. The EPS was 88 cents on $21.2 billion in revenue a year earlier.
According to industry publication Inside Mortgage Finance, WFC market share slid 23% in Q2.
Chief Financial Officer Tim Sloan remarked at an investor conference on September 9 that “mortgage revenue to decline in the third quarter with declines in mortgages and originations.”
Sloan projects that Wells Fargo will make $80 billion in home loans in Q3, almost 30% below its Q2 figure. Gain-on-sale margins - an important measure for the bank - would slide 32%.
Higher Mortgage Rates
Until now, banks have gained a lot from the Fed's $85 billion-a-month in purchases of Treasury bonds and mortgage-backed securities. Low interest rates have impelled millions of borrowers to refinance their home loans to make maximum use of the lower costs.
The forecasts reflect clients pulling back amid speculation that the government will scale back its stimulus.


The average rate on 30-year fixed-rate mortgages rose to a high of 4.8% in September. Today on CNBC, a breaking story was that yields were at a two-week high on debt deal hopes.
Be Bullish
Bank stocks are up 25% year-to-date. However, bank stocks are going to depend on the macro-economic environment.  If economic growth continues to be slow it will difficult for Wells Fargo to improve its EPS and revenue growth.
Wells Fargo will kick off bank earnings on October 11 along with the biggest U.S. bank by assets - JPMorgan Chase & Co. (NYSE: JPM).
Bank of America Corp (NYSE: BAC), Citigroup Inc (NYSE: C), Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc (NYSE: GS) release results the following week.
Shares of Wells Fargo closed up 1.08%, to $41.44 a share in Thursday's session. The stock has risen over 18% so far this year.

Category: Stocks

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