Wells Fargo & Co. (WFC, Financial) is slated to reveal its earnings report for the first quarter of FY2015 on April 14. Wells Fargo is the largest US bank with a market cap of nearly $280 billion. The bank’s results, which come at the heels of results from rival JP Morgan Chase (JPM, Financial), are expected to draw significant attention from investors since its performance provides a comprehensive picture of the overall economy. The company also competes with other large US banks such as Bank of America Corporation (BAC, Financial) and Citigroup Inc. (C, Financial).
Wells Fargo saw 3.3% year-over-year growth in revenues to $21.4 billion during the fourth quarter of fiscal 2014. The company also logged 1.78% year-over-year growth in net income to $5.71 billion or $1.02 a share for the quarter, compared to the company’s earnings of $1.00 a share in Q4 2013. The bank saw average loans increase 4.4% during the quarter, while average core deposits grew to 7.3%. However, net interest margin declined from 3.27% in the fourth quarter of FY2013 to 3.04%, while return on equity dropped year-over-year to 12.84%. For the full fiscal 2014, the company reported 0.6% year-over-year growth in revenues to $84.3 billion, while net income grew 5.4% over the previous fiscal to $23.06 billion or $4.10 a share compared to $3.89 a share in FY2013. Shares of the company are up 6.5% since the last earnings report.
Recovering Economy, Investment Bank Likely to Push Growth
With the global economy showing signs of gradual recovery, banks in general are seeing a rising trend in student, credit card and auto loans, while commercial real estate lending is also picking up. The trend is likely to have played out well for Wells Fargo in the first quarter, given its core strength in the segment. Lending in the energy sector however, is likely to remain a significant headwind owing to the drastic decline in oil costs. Like its other counterparts, Wells Fargo has continued with strategies for cost-containment, strengthening the balance sheet and improving overall efficiency to remain profitable in the backdrop of a tough industry.
So far, the bank has kept its business simple and has been rewarded by investors for its conservative approach. The bank’s shares have grown almost 70% over the last five years, representing a growth of over 30 percentage points compared to rival JP Morgan Chase. Wells Fargo’s conservative strategies have also cushioned it from expenditure related to regulatory compliances, with the bank’s settlements, fines and expenses related to the financial crisis coming up to less than half of what JP Morgan has coughed up.
However, Wells Fargo is looking to expand into a newer range of businesses with the opening of overseas operations, reinforcing trading assets and revitalizing its investment bank. While the bank generated fees of $1.71 billion at its investment bank, up 77% compared to the figures in 2010, Wells Fargo’s investment bank is likely to get a boost from the closing of its deal to buy a portfolio of commercial real estate and office buildings debt worth $26.5 billion from General Electric Co. (GE, Financial). Although the bank’s foray into new frontiers is expected to result in higher growth, it will also expose Wells Fargo to far greater risks compared to its retail and mortgage banks in the US. Further, to make itself more attractive to multinational businesses, the typical American bank is taking steps towards setting up operations in foreign markets. While Wells Fargo started lending operations in Singapore in January 2015, the bank is also exploring certain European markets.
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Final Thoughts
While Wells Fargo posted in-line fourth quarter and full fiscal quarter earnings for FY2014, the bank continues to expend efforts at cost-containment in the tough economic backdrop. Although the return of volatility in global financial markets is likely to boost Wells Fargo’s investment banking trading revenues in the first quarter, experts are looking at muted revenue growth, in keeping with the prior quarters, owing to enduring pressure on net interest income in a low interest environment and passive growth in non-interest income. Investors will be looking in particular for the bank to announce a major buyback plan for the coming years. Consensus estimates peg the bank’s Q1 earnings at $0.98 on revenues of $21.24 billion. Wells Fargo shares have mostly traded in the $50-$55 range in the last three months, hitting a 52-week high of $56.29 in March 2015. The Wells Fargo stock carries a price estimate of $54.28 a share, and a ‘buy’ guidance.
