Although Wells Fargo & Co (NYSE:WFC) earnings exceeded Wall Street estimates, profits declined year-over year for the first time in more than four years as generationally low net interest margins, loan-loss reserves and record results a year ago took some of the shine off WFC stock.
To be fair, Wells Fargo earnings came up against difficult year-ago comparisons. The first quarter of 2014 was a whopper. Furthermore, Wells Fargo earnings showed improvement in several key areas.
But as much as the market likes WFC stock best, the bank is not immune to weakness in the broader economy — and that’s conspiring to hamper and occasionally even halt growth.
On the plus side, WFC, the nation’s largest mortgage business got a lift from a stronger housing market. Loan growth likewise grew smartly. Commercial and industrial loans rose 13%, while auto and credit card loans increased 7% and 15%, respectively. That’s no small feat in an economy that’s still growing more in fits than starts.
But what’s sure to give the market pause when it comes to WFC stock is that net interest margin — or the difference between what WFC pays for deposits and charges for loans — dropped below 3% for the first time since the 1990s.
Net interest margin has been under pressure at WFC throughout this period of ultra-low interest rates. The weakness there is by no means a surprise. But there’s little the bank can do about it except wait for a Federal Reserve rate hike. That rate hike has to come sooner rather than later for WFC or profitability is going to remain under pressure.
WFC Loan Losses Increasingly a Concern
Another serious worry for the nation’s biggest bank by market value is its exposure to the oil and gas industry, which is reeling from the crash in energy prices. WFC set aside another $608 million to cover loans that could potentially turn bad. That was on top of the $485 million in loan-loss reserves taken in the fourth quarter. (In last year’s first quarter, WFC set aside a more modest $325 million.)
Given that WFC lost $700 million to loan defaults in the quarter, this exposure to oil and gas is sure to remain a headwind throughout this year. Another factor likely to work against the stock is higher costs.
WFC has been the most attractive big bank and big bank stock throughout the post-crisis period, but as the most recent Wells Fargo earnings show, it’s at the mercy of external forces like everyone else.
However, with no big surprises coming out of earnings, WFC stock should be able to continue its mostly market-matching ways this year. That is unless it portfolio of gas and oil loans blows up. Then all bets are off.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
