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Can Wells Fargo (WFC) Touch New Highs on Solid Q1 Earnings?

Zacks.com logo Zacks.com 4/12/2021

Wells Fargo WFC, which is trading close to its 52-week high with 29.4% gain in the January-March period, might rally further post first-quarter 2021 results on Apr 14.

Impressive gain during the quarter was an outcome of Federal Reserve giving green signal to the company’s proposal for overhauling risk management and governance. The move is a step forward for the bank to get its asset growth limit removed. Moreover, Wells Fargo undertook several divestitures in the quarter, with a view to focus more on core operations and improve efficiency. Sale of these business is likely to improve liquidity and enable investments in profitable avenues.

In the quarter under review, historically low mortgage rates continued to fuel momentum in mortgage banking activities, supported by high refinance activity and robust purchases. Relaxed lockdown measures and gradually improving economic conditions might have resulted in prospective homebuyers entering the housing market again to take advantage of the low rates.

In a conference held in February-end, CFO Mike Santomassimo said that mortgage origination had been growing year over year, despite expectations of a slowdown in 2021. He said the trend to be "still pretty robust".

Notably, the Zacks Consensus Estimate for Wells Fargo’s mortgage banking revenues is pegged at $1.08 billion for the March quarter, which suggests significant growth from the year-ago reported number.

Now, let’s take a look at the other factors that are likely to have influenced Wells Fargo’s first-quarter performance:

Muted Net Interest Income (NII): Despite the resumption of business activities, overall growth in loans was somewhat soft in the first quarter. Per the Fed’s latest data, consumer, commercial and industrial loans, and commercial real estate loans portfolios remained weak. Thus, the company’s interest income might have witnessed less support from this avenue.

Also, persistent low interest rates are likely to have hurt Wells Fargo’s net interest margin and income. However, low deposit costs and steepening of treasury yields are likely to have been an offsetting factor. The Zacks Consensus Estimate of $9.1 billion for NII suggests a 20.3% decline from the prior-year quarter.

Overall Non-Interest Revenues Growth: The first quarter witnessed continued strength in equity markets, boosting market-driven revenues. Also, record investment banking activity levels, with both equity underwriting and M&A volumes up, might have offered support.

Wealth, trust, trading and asset management revenues are expected to have recorded high numbers. Moreover, as the lockdown measured remained relaxed during the quarter under review, card fees are anticipated to have supported consumer spending.

High Expenses: Wells Fargo’s costs might have flared up during the quarter, given its franchise investments in areas like mobile-banking technology, digital lending and brokerage offerings. Additionally, customer remediation expenses and ongoing litigation hassles are likely to have resulted in elevated legal costs in the quarter to be reported.         

Asset Quality: Significant reserves that were built in 2020 owing to deterioration in the macroeconomic backdrop are likely to have been released in the first quarter, with support from stimulus packages and improvement in economic conditions.

Here is what our quantitative model predicts:

Wells Fargo has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

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

Earnings ESP: The Earnings ESP for Wells Fargo is +5.32%.

Zacks Rank: Wells Fargo currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate of 68 cents per share for earnings for the to-be-reported quarter has been revised upward over the past 30 days. It suggests significant growth from the year-ago reported figure of 1 cent.

However, the consensus estimate of $17.5 billion for quarterly sales indicates a 1.5% decline from the prior-year quarter.

Wells Fargo & Company Price and EPS Surprise

chart, line chart: Wells Fargo & Company Price and EPS Surprise © Provided by Zacks.com Wells Fargo & Company Price and EPS Surprise

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

Other Banks Worth a Look

Here are some other stocks you may want to consider, as according to our model these have the right combination of elements to post an earnings beat this quarter.

JPMorgan Chase & Co. JPM is slated to report quarterly results on Apr 14. The company has an Earnings ESP of +0.33% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Citigroup C is +4.48% and it carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Apr 15.

The Goldman Sachs Group, Inc. GS is slated to report quarterly earnings on Apr 14. The company, which sports a Zacks Rank of 1 at present, has an Earnings ESP of +3.83%.

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