Wells Fargo (WFC) Q3 Earnings Beat on Strong Mortgage Banking – October 14, 2020

Aided by robust mortgage banking revenues, Wells Fargo (WFC – Free Report) reported third-quarter 2020 adjusted earnings of 56 cents per share, beating the Zacks Consensus Estimate of 47 cents. Results, however, compare unfavorably with the prior-year quarter figure of 92 cents. Including certain adjustments, net income came in at $2.04 billion or 42 cents per share.

The stock depreciated more than 1% in pre-market trading, reflecting investors’ disappointment with the results. Notably, the full-day trading session will display a clearer picture.

Increased gains on trading activities also supported the bank. Moreover, the company reflects prudent expense management. Further, high loans and deposits balance display a strong capital position. However, reduced net interest income on lower rates negatively impacted the company’s results. Provisions also soared during the reported quarter.

The quarter’s total revenues came in at $18.9 billion, beating the Zacks Consensus Estimate of $17.96 billion. The revenue figure, however, comes in lower than the year-ago quarter’s $22 billion.

Furthermore, quarterly revenue generation at the business segments disappointed, on a year-over-year basis. The Community Banking segment’s total quarterly revenues slipped 4.5% and Wholesale Banking revenues were down 18.8%. Further, revenues in the Wealth and Investment Management unit fell 25.5%.

Net Interest and Fee Income Fall, Costs Stable

Wells Fargo’s net interest income in the third quarter came in at $9.4 billion, down 19% year on year. Lower interest income mainly resulted in this downside, partly offset by decreased interest expenses. Furthermore, net interest margin shrunk 53 basis points (bps) year over year to 2.13%.

Non-interest income at Wells Fargo came in at $9.5 billion, sliding 9% year over year, primarily on fall in card fees, lending-related fees, deposit-related fees, trust and investment fees, net gains on debt and equity securities along with other income. These declines were partly offset by higher revenues from net gains from trading activities and mortgage banking.

As of Sep 30, 2020, total loans were $920.1 billion, down 2% sequentially. Lower commercial loans were partly negated by higher consumer loans. Total deposits came in at $1.38 trillion, down 2% from the prior quarter.

Non-interest expense at Wells Fargo was $15.2 billion during the July-September quarter, almost flat year on year. Higher personnel, occupancy, leases, restructuring charges and other expenses were muted by lower operating losses, along with reduced advertising and promotion costs.

The company’s efficiency ratio of 80.7% came in above the 69.1% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality: A Concern?

Wells Fargo’s credit quality metrics were a mixed bag during the September-end quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $20.5 billion as of Sep 30, 2020, significantly up 93.4% year over year.

Net charge-offs were $683 million or 0.29% of average loans in the reported quarter, up 5.9% from the year-ago quarter’s net charge-offs of $645 million (0.27%). Non-performing assets increased 36.7% to $8.2 billion in the third quarter from the $6 billion reported in the year-earlier period. Notably, provision for credit losses was $751 million compared with the prior-year quarter’s $695 million.

Healthy Capital Position

Wells Fargo has maintained a sturdy capital position. Wells Fargo’s Tier 1 common equity under Basel III (fully phased-in) decreased to $134.9 billion from the $144.7 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.4% under Basel III (fully phased-in) as of Sep 30, 2020, down from the year-earlier quarter’s 11.6%.

Book value per share declined to $38.99 from the $40.48 recorded in the comparable period…