Will Mortgage Banking Aid Wells Fargo's (WFC) Q4 Earnings?

Wells Fargo (NYSE:WFC) is scheduled to report fourth-quarter and full-year 2019 earnings on Jan 14, before the opening bell.

This San Francisco-based banking giant has been embroiled in one scandal after another for more than three years. Troubles have been mounting at Wells Fargo since the revelation of the sales scandal in 2016, which was followed by disclosure of issues in the auto insurance business, online bill-pay services, and the Wealth and Investment Management segment. With the ongoing review process of business practices, more wrongdoings may be reported, consequently straining the bank’s top line.

Wells Fargo’s mortgage banking revenues are likely to have supported top-line growth to some extent on the back of rise in mortgage refinance volume owing to low interest rates in the fourth quarter.

In addition, management expects mortgage originations for the quarter to have been up due to seasonality for home buying, and some additional refinance activity, which resulted from a decrease in mortgage interest rates.

Here are other factors that are likely to have influenced Wells Fargo’s Q4 results:

Soft Loan Growth: Per the Fed’s latest data, rise in loans are likely to have remained low on a sequential basis for the December-end quarter. Particularly, weakness in revolving home equity, commercial and industrial, and consumer loans might have offset growth in commercial real estate.

Furthermore, the Fed’s restrictions on Wells Fargo’s balance-sheet growth due to past misconducts are likely to have limited the scope for loan growth.

Muted Net Interest Income (NII): A soft lending scenario during the fourth quarter is predicted to have affected NII growth to some extent. Moreover, the central bank’s accommodative monetary-policy stance on interest rate and slowdown in global economy are likely to have affected banks’ net interest margins.

Higher Expenses: Wells Fargo might have recorded escalated costs, given its franchise investments in areas including mobile banking technology, digital lending and brokerage offerings. Additionally, ongoing litigation hassles are likely to have resulted in elevated legal costs in the quarter to be reported.

Slight Rise in Non-Interest Revenues: Inflows from the asset-management business might have been recorded on market gains. In addition, trust income is estimated to have led to improvement in strong equity markets. However, growth in trading revenues might have been soft as lingering uncertainties, mainly related to the U.S.-China trade war, and some other geo-political tensions were insufficient to induce volatility.

Now, let’s have a look at what our quantitative model predicts:

According to our quantitative model, chances of Wells Fargo beating the Zacks Consensus Estimate in the fourth quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Wells Fargo is -0.22%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

Though the Zacks Consensus Estimate for the soon-to-be-reported quarter’s earnings has moved slightly north over the past seven days, it calls for a year-over-year decline of 7.4%. Also, the Zacks Consensus Estimate for sales is pegged at $19.9 billion, indicating a decline of 5.4% year over year.

Wells Fargo & Company Price and EPS Surprise

Stocks That Warrant a Look

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

Fifth Third Bancorp (NASDAQ:FITB) is slated to release quarterly results on Jan 22. The company has an Earnings ESP of +0.59% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation (NYSE:MTB) is scheduled to report quarterly earnings on Jan 23. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +0.38%.

The Earnings ESP for Northern Trust Corporation (NASDAQ:NTRS) is +0.45% and it carries a Zacks Rank of 2 (Buy), currently. The company is set to report quarterly numbers on Jan 22.

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