Wells Fargo (WFC) Q2 Earnings: Disappointment In Store?

WELLS FARGO-NEW Price and EPS Surprise

WELLS FARGO-NEW Price and EPS Surprise | WELLS FARGO-NEW Quote

Factors to Influence Q2 Results

Global economy, persistent low interest rate environment and volatile oil prices have remained concerns for the banking stocks. Brexit has further added to the troubles. While energy loans are still a concern, the provision requirement should not be as high as it was in the first quarter as oil prices have recovered to some extent.

Despite a rise in loan demand, revenue growth will remain restrained (similar to previous quarters). This is because of a continuing low rate environment on net interest income, though a small uptick might be recorded.

Mortgage business on the other hand seems to be rising, as the low rate environment may have pushed people to refinance their home loans. Moderate growth in fresh mortgage originations is also expected.

Efforts to strengthen the top line by focusing more on non-interest income has not been very successful either. However, trading activity was impressive in the first two months of the quarter. While client activity was weaker in equities, it was higher for fixed income. It is expected that Brexit and other macro concerns may offset the early momentum.

Additionally, investment banking business is likely to remain weak as persistent decline in M&A activities and a weakening IPO market in the wake of global economic concerns continues. Additionally, continued shift towards electronic platforms may have weighed on investment banking.

Banks are continuously looking for restructuring activities to control costs and improve its bottom-line performances. In a bid to increase its market share in commercial lending markets, Wells Fargo completed the acquisition of General Electric (NYSE:GE) Company’s Commercial Distribution Finance (CDF) business in Asia.

Industry-wide weakness in the key operating segments and regulatory matters are expected to hamper the results. Though Wells Fargo has implemented company-wide expense management initiatives, it is facing challenges to manage costs. Over the past few quarters, the company has been experiencing an increase in non-interest expenses. The absence of significant improvements in cost management is expected to continue to hurt the company’s bottom line.

Notably, the efficiency ratio for full year 2016 is anticipated to be at the higher end of the company’s targeted range of 55–59%. Though the company does not expect to record seasonally higher personnel expenses in the second quarter, other expenses, including salary expense reflecting annual merit increases and certain other expenses such as outside professional services and advertising costs are expected to increase in the second quarter.

Additionally, the legal costs are now an integral part of Wells Fargo’s financials. With increasing regulatory scrutiny on the business model, Wells Fargo is not expected to rid itself of such expenses, at least in the near term, though settlement efforts should take some burden off its shoulders.

Most importantly, this banking giant has failed to impress analysts with its level of activities during the quarter. The Zacks Consensus Estimate remained stable at $1.02 per share over the last seven days.

Earnings Whispers

Our proven model shows that Wells Fargo is likely to miss the Zacks Consensus Estimate in the second quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Wells Fargo is -0.98%. This is because the Most Accurate estimate of $1.01 is below the Zacks Consensus Estimate of $1.02.

Zacks Rank: Wells Fargo’s Zacks Rank #4 (Sell) further lowers the predictive power of ESP. Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as according to our model they have the right combination of elements to post an earnings beat this quarter.

Comerica Inc. (NYSE:CMA) has an earnings ESP of +1.47% and carries a Zacks Rank #3. It is scheduled to report its second-quarter results on Jul 19.

The earnings ESP for Regions Financial Corp. (NYSE:RF) is +5.00% and it carries a Zacks Rank #3. The company is expected to release its second-quarter results on Jul 19.

Federated Investors, Inc. (NYSE:FII) has an earnings ESP of +2.13% and carries a Zacks Rank #3. It is slated to report its second-quarter results on Jul 28.

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