Wells Fargo Earnings Again Hit by Regulatory Charges with Another $2 billion in Charges

Wells Fargo reported better than third quarter earnings before the bell Friday, other than an additional $2 billion to resolve a variety of legacy regulatory and legal woes from the costly fallout from scandals. Wells Fargo set aside $784 million in provisions for potential credit losses, more than the $611 million analysts had expected.

Bankers

Reporting also this week were JPMorgan Chase (JPM) PNC Bank (PNC), Morgan Stanley MS and Citibank (C) along with BlackRock (BLK).

Wells Fargo Earnings Preview

Q3 2022 earnings release at 7 a.m. ET; conference call at 10 a.m. ET

  • Net income fell 31% to $3.53 billion, or 85 cents a share. The one-time regulatory charge cut earnings by 45 cents a share.
  • EPS 0.85$ (est $1.08)
  • Revenue $19.51B (est $18.81B)
  • Wells Fargo Q3 provision for credit losses $784.0M (est $610.8M)
  • Net Interest Income $12.10B rose 36% (est $11.46B)
  • Quarter Includes A $2.0B Loss for Regulator Matters and Other Costs
  • Net interest margin expanded to 2.83% at Wells Fargo, up from 2.39% in the preceding quarter.
  • $WFC Pre-market $42.95+0.57 (1.34%)
  • $WFC had dropped 12% this year through Thursday, outperforming the 19% decline for the 66-company S&P 500 Financials Index.

“Our top priority remains strengthening our risk and control infrastructure, which includes addressing open historical issues and issues that are identified as we advance this work,” Chief Executive Officer Charlie Scharf, said in the statement. “We remain at risk of setbacks as we work to complete the work and put these issues behind us.”

Credit Losses

Wells Fargo set aside $784 million in provisions for potential credit losses, more than the $611 million analysts had expected. Analysts are watching credit risk updates after the bank’s sharp drop in profits flowed from boosting its provision for credit losses by $580 million in the second quarter.

The bank expects delinquencies and credit losses to rise, though the timing of those increases is unclear, Scharf said.

“We will continue to prudently manage our capital levels to be appropriately prepared for a range of scenarios, including a slowing economy and market volatility,” Scharf said.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.

Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Higher rates increase margins

Net interest income rose 36% to $12.1 billion for WFC in the three months ended Sept. 30, the San Francisco-based bank said Friday in a statement. That’s the most since 2019 and better than the 31% average estimate of analysts surveyed by Bloomberg.

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 rise in interest rates with the Fed leads banks tol benefit from rising rates, provided that they don’t go up too rapidly and hurt demand for mortgages, credit cards and other loans.

There is that reputational risk hangs over the bank after a series of scandals that included creating fake customer accounts.

Source: JPM, WFC, C, BLK,

Live From The Pit

From The TradersCommunity Research Desk