Wells Fargo report first quarter earnings before the bell Friday along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C) and PNC. Wall Street expects Wells Fargo earnings will jump 28.% as they were relatively shielded from the banking panic. That said, Wells Fargo continues to be hurt by a variety of legacy regulatory and legal settlements. WFC last quarter set aside another $957 million in provisions for potential credit losses, after reducing its provisions by $452 million a year ago.
Wells Fargo Earnings Preview
Q1 2023 earnings release at 7 a.m. ET; conference call at 12 p.m. ET
- Projected EPS: $1.12 a share
- Projected revenue: $20.06 billion
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.
Cautions Remains
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 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
Wells Fargo Last Quarter Earnings
Analysts Outlook on Banks
KBW
KBW reduced its earnings estimates for banks across the board by 8% for 2023 and 11% in 2024,
“Bank stock performance around 1Q23 earnings will likely be dictated by relative balance sheet performance (deposits, liquidity and capital),” KBW said.
Morningstar– Eric Compton, CFA Apr 5, 2023
“Although we believe the U.S. banking sector as a whole is currently undervalued, the three banks that we think most deserve investor focus in the lead-up to first-quarter earnings are Comerica CMA, U.S. Bancorp USB, and Citigroup C. Each has its own risk/reward setup.
We believe the biggest risks to our top picks would be negative surprises on deposit bases or funding costs, or the realization of a recession in the near term. While we think the U.S. banks are already trading at recessionary valuations, an actual recession would be unlikely to help valuations in the short term.”
Piper Sandler
Signs of asset quality deterioration are a risk for PNC Financial Services Group (PNC US), Piper Sandler analysts warn. Consensus sees the bank setting aside an additional $308 million in loan-loss provisions in the first quarter, compared to the $208 million released in the same period a year ago.
Yet PNC is expected to hold up well to heightened scrutiny over bank deposits; according to data compiled by Bloomberg, the rate of funds leaving PNC’s balance sheet quarter-on-quarter is expected to slow to less than a percentage point, compared to about 1.5% a year ago. PNC’s ability to rein in expenses will also be assessed in its pre-open earnings report, with consensus seeing non-interest costs rise by about 6% from a year ago, the first increase in three quarters.
Wedbush
“1Q earnings will likely be pressured, in our view, as we see banks shift towards a more defensive and conservative stance, and we anticipate a slew of downward revisions to guidance,” Wedbush analysts said in a March 29 research note. “We expect loan growth to slow from the strong pace over the prior few quarters as demand cools in light of higher rates and the uncertain economic environment.”
Higher rates increase margins but there is a cost
Understandably there is a crisis of confidence in regional banks sparked off by last month’s collapse of Silicon Valley Bank. We warned last quarter higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. To that we warned of the downside, what we didn’t know is how poorly the regional banks were managed. Silicon Valley and Signature Banks will be taught in economic classes along with Enron, South Sea Bubble and Worldcom in business and economic classes.
“US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses… Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks… Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms… The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period.” April 7 – Bloomberg (Alexandre Tanzi)
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. The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter.
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.
Source: WFC, TV, WSJ
From The TradersCommunity Research Desk