Wells Fargo (WFC) Q2 Loss Wider Than Expected, Provisions Up

Wells Fargo’s WFC shares lost more than 6% in the pre-market trading session, following the release of second-quarter 2020 results. The company reported a loss per share of 66 cents, which was attributed to a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 7 cents.

Reduced net interest income on lower rates and a disappointing fee income negatively impacted the company’s results. Notably, lower mortgage banking revenues and service charges on deposit accounts were major drags.

Provisions also soared on the coronavirus crisis during the reported quarter. Further, rise in non-interest expenses and a decline in loan balance acted as headwinds.

The company reported net loss of $2.4 billion in the second quarter against net income of $6.2 billion recorded in the prior-year quarter.

The quarter’s total revenues were $17.8 billion, lagging the Zacks Consensus Estimate of $18.3 billion. Also, revenues were lower than the year-ago quarter’s $21.6 billion.

Furthermore, on a year-over-year basis, the quarterly revenue generation at the company’s business segments was disappointing. The Community Banking segment’s total quarterly revenues slipped 25.7% and Wholesale Banking revenues were down 7.1%. Further, revenues in the Wealth and Investment Management unit fell 9.6%.

Lower Rates Hurt Revenues, Expenses Rise

Wells Fargo’s net interest income in the second quarter came in at $9.9 billion, declining 18% year over year. Lower interest income on account of lower rates mainly resulted in this downside, partly offset by decreased interest expenses. Furthermore, net interest margin shrunk 57 basis points (bps) year over year to 2.25%.

Non-interest income at Wells Fargo was $8 billion, plunging 16% year over year primarily due to a fall in card fees, other fees, insurance, service charges on deposit accounts, lease income, other income, net gains from equity securities, mortgage banking revenues, and trust and investment fees. The declines were partly muted by higher net gains from trading activities and debt securities.

As of Jun 30, 2020, total loans were $935.2 billion, declining 7.4% sequentially. The decline resulted from lower demand for commercial and consumer loans. Total deposits were $1.4 trillion, rising 2% from the prior quarter.

Non-interest expenses at Wells Fargo were $14.6 billion during the April-June quarter, rising 8% from the year-earlier period. The rise primarily resulted from higher personnel, occupancy along with FDIC and other deposit assessment-related expenses. These were partially offset by a decline in technology and equipment-related costs, and core deposit and other intangibles.

The company’s efficiency ratio of 81.6% was above 62.3% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality Worsens

Wells Fargo’s credit quality metrics worsened during the June-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $20.4 billion as of Jun 30, 2020, up considerably year over year.

Net charge-offs were $1.1 billion or 0.46% of average loans in the reported quarter, rising 70.4% from the year-ago quarter’s net charge-offs of $653 million (0.28%). Non-performing assets climbed 23.8% to $7.8 billion in the second quarter from $6.3 billion reported in the year-earlier quarter. Notably, provision for credit losses was $9.6 billion compared with the prior-year quarter’s $503 million.

Capital Position

Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $133 billion from $149.2 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 10.9% under Basel III (fully phased-in) as of Jun 30, 2020, down from the year-earlier quarter’s 12%.

Book value per share declined to $38.67 from $40.10 recorded in the comparable period of the last year.

Negative return on assets was 0.49% compared with the prior-year quarter’s positive return of 1.31%. Also, negative return on equity was 6.63% against the year-ago quarter’s positive return of 13.26%.

As of Jun 30, 2020, eligible external total loss-absorbing capacity as a percentage of total risk-weighted assets was 25.3% compared with the minimum requirement of 22%.

Capital Deployment Update

Wells Fargo expects to reduce its third-quarter common stock dividend to 10 cents per share from the previous payout of 51 cents. The decision is subject to approval by the board of directors by the end of this month.

The move comes after Federal Reserve puts a limit on dividend distributions for large banks amid the coronavirus scare.

Our Viewpoint

Despite several legal tensions, Wells Fargo remains focused on maintaining its financial position. In addition, the company is working on strategic initiatives, which might help regain the confidence of its clients and shareholders.

Nevertheless, top-line headwinds along with lower interest rates and fee income woes are expected to prevail amid the coronavirus outbreak. Furthermore, the flaring up of provisions is concerning.

Wells Fargo Company Price, Consensus and EPS Surprise

 

Wells Fargo Company Price, Consensus and EPS Surprise

Wells Fargo Company price-consensus-eps-surprise-chart | Wells Fargo Company Quote

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other major banks, Goldman Sachs GS, U.S. Bancorp USB and PNC Financial PNC will report their quarterly figures on Jul 15.

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