Wells Fargo reported disappointing fourth quarter earnings before the bell Friday along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C) and Bank of America (BAC). WFC Net income fell 50% to $2.86 billion, or 67 cents a share, from $5.75 billion, or $1.38 per share, a year ago. Wells Fargo continues to be hurt by a variety of legacy regulatory and legal settlements. WFC also set aside another $957 million in provisions for potential credit losses, after reducing its provisions by $452 million a year ago. Earlier this week the bank said it would retrench from the U.S. mortgage market.
Wells Fargo Earnings Preview
Q4 2022 earnings released at 7 a.m. ET; conference call at 12 p.m. ET
- Net income fell 50% to $2.86 billion, or 67 cents a share, from $5.75 billion, or $1.38 per share, a year ago. Projected EPS: 60 cents
- Revenue: $19.66B (exp $19.95B) Projected revenue: $20.01 billion
- Net Interest Income: $13.43B (exp $12.99B)
- Home lending revenue was down 57% this quarter.
- Provision For Credit Losses: $957M (exp $860.2M), after reducing its provisions by $452 million a year ago. The provision included a $397 million increase in the allowance for credit losses reflecting loan growth and a less favorable economic environment, the bank said.
- Wells Fargo CFO: Share Buybacks Expected to Resume in Q1 This Year
- Reports $3.3Bln Of Operating Losses in Q4
WFC: Stock Market Reaction
- 43.16 +0.33 (0.77%) Morning
- 43.16 +1.37 (3.28% YTD
- 43.16 -12.84 (22.93%) Over year
- 43.16 -19.96 (31.62%) Over 5 years
- 52wk High $59.18
- 52wk Low $36.06
Penalties continue to happen over at Wells Fargo and Wells Fargo Chief Executive Officer Charlie Scharf said last month that the $2 billion set aside last quarter “isn’t the end of it,” according to Reuters.
“Though the quarter was significantly impacted by previously disclosed operating losses, our underlying performance reflected the progress we are making to improve returns,” CEO Charlie Scharf said in a statement. “Rising interest rates drove strong net interest income growth, credit losses have continued to increase slowly but credit quality remained strong, and we continue to make progress on our efficiency initiatives.”
Investors remain cognizant that WFC has a multiyear effort to satisfy regulatory requirements, with setbacks likely to continue along the way. There is that reputational risk hangs over the bank after a series of scandals that included creating fake customer accounts.
Wells Fargo also said last month that it would have a $2.8 billion after-tax operating loss tied to legal and regulatory costs. The combined impact of the legal, regulatory and customer remediation efforts lowered Well Fargo’s earnings by 70 cents per share.
Wells Fargo penalties:
- $3.7 billion in 2022 for consumer abuses
- $3 billion in 2020 for fraud
- $2 billion in 2018 for toxic securities abuses
- $1.9 billion in 2013 for banking violations
- $5.3 billion in 2012 for mortgage abuses
“As we look forward, we are carefully watching the impact of higher rates on our customers and expect to see deposit balances and credit quality continue to return toward pre-pandemic levels,” Scharf said.
Mortgage Market Weakness
Wells Fargo announced earlier this week that it would retrench from the U.S. mortgage market. Meanwhile, Wells Fargo is a large mortgage lender in the US, with mortgages applications falling its profits will fall accordingly. November US existing home sales from the National Association of Realtors fell 7.7% month-over-month in November to a seasonally adjusted annual rate of 4.09 million (consensus 4.20 million) versus an unrevised 4.43 million in October.
Analysts Outlook on Banks
RBC Capital Markets – Gerard Cassidy
NII will continue to be the “primary driver of performance” during last year’s fourth quarter. Large banks are expected to report NII growth average above 30% during the quarter. In 2023, if the Fed pauses rate hikes, NII will slow from an “unsustainable pace” in 2022 to “what we think will be 10% to 12%,” Cassidy said. “Net interest income growth is going to be the talk amongst investors for the quarter and the year.”
Combined total revenue, net interest and noninterest income should “not be materially different” next year, even though NII “will come down meaningfully.” “The reason being is that you’re going to see fee revenues go from a negative year-over-year comparison, we think, to a positive one”.
Higher loan-loss provisions could be likely for two reasons. One is that “it’s very hard to see around corners,” he said. “The forecast is saying you’ve got to build up reserves.” “If you’re a bank, why not assume the worst and jack up reserves in the fourth quarter?”
“Throw in a much bigger number than you need, then go light on provisioning next year and show better earnings growth than your peers.”
Banks are likely to report “solid” but “moderating” NII growth and net interest margins. Predict “generally weaker” fee income during the fourth quarter, contributing to a 6.8% decline in noninterest income for regional banks compared to the same period in 2021,
“Peak loan growth in the current cycle could be behind us.” Fourth-quarter results are likely to show loan growth at a “solid” but moderated” pace. “Particularly concerned” about the slowing pace of CRE. Noted it typically takes around a year after the Fed begins a rate-hike cycle for loans to “begin rolling over.”
Loan growth could go two ways: either momentum builds in higher-yielding segments alongside increasing commercial utilization rates, or “cautious corporates and a weaker consumer” causes “loan growth [to] grind to a halt.”
“While loans have been growing, deposits have been shrinking,” “Depositors are waking up and starting to demand yield on their cash”.
Expect “more modest” bank revenue alongside similar NII growth throughout the year. 2023 will bring “loan-loss normalization” if the Fed pauses rate hikes. Asset-sensitive business groups such as lower-end consumer and commercial real estate to be “less constructive” and areas where “loan losses will adjust the fastest.”
Wells Fargo Last Quarter Earnings
Higher rates increase margins
The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses. The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.
The Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing banks to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.
FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.
Source: WFC, TV, WSJ
From The TradersCommunity Research Desk