Wells Fargo & Co (WFC) Stock Slumps Following Solid Q2 Earnings Report

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WFC - Wells Fargo & Co (WFC) Stock Slumps Following Solid Q2 Earnings Report

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To say the past few months have been tough ones for Wells Fargo & Co (NYSE:WFC) would be something of an understatement. They’ve been awful. From last September’s news that its bankers opened 2 million unauthorized accounts followed by reports of retaliation against whistleblowers, and then most recently allegations of unauthorized loan modifications, its reputation has been pretty well battered and bruised.

Wells Fargo & Co (WFC) Stock Slumps Following Solid Q2 Earnings Report

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The Wells Fargo earnings figures posted on Friday morning, however, don’t look like those of a bank that created any significant problems for itself. Sales growth was healthy, and profits rolled in almost oddly higher than expected as the organization fought hard to offset the ill effects of the gaffes.

Still, WFC stock was down shortly after the Q2 numbers revealed disappointing revenue, implying the solid numbers still weren’t solid enough to satisfy investors.

Wells Fargo Earnings Recap

For the quarter ending in June, Wells Fargo turned revenue of $22.2 billion into income of $1.07 per share. Analysts were collectively expecting the bank to report a profit of $1.01 per share — the same figure from a year earlier — on revenue of $22.47 billion. The projected top line was 1.4% higher on a year-over-year basis. Loans, deposits and net interest income were all up year-over-year, and the quality of its loan portfolio continued to improve.

Perhaps just as important (if not more so), the bank’s fully phased-in common tier-1 equity ratio moved to 11.6%, helping Wells Fargo secure the Fed’s blessing for its expanded capital-return program. The bank gave back $3.4 billion worth of value to shareholders last quarter, or 63% of income, in the form of dividends and stock buybacks.

CFO John Shrewsberry commented to WFC stock holders of the company’s fiscal Q2 results:

“Wells Fargo reported $5.8 billion of net income in the second quarter, up on a linked-quarter and year-over-year basis. Overall results were solid in a period with continued modest economic growth and included growth in net interest income and continued improvement in credit results. Second quarter 2017 also included discrete tax benefits totaling $186 million, or approximately $0.04 per share, primarily as a result of our agreement to sell Wells Fargo Insurance Services.”

The only arguable blemish was the decline in the company’s community banking income, which fell year-over-year last quarter. That dip, however, was more than offset by income growth for its wholesale banking and wealth-management arms.

All in all it wasn’t a bad quarter for relatively new CEO Timothy Sloan who inherited an operation that looked impressive from the outside, but in retrospect was clearly flawed.

One of those flaws was the tacit, complicit establishment of an environment that would allow bank-branch employees to open the aforementioned 2 million bank or credit card accounts so those bankers would meet their sales quotas.

Shortly after the Consumer Protection Board reported the matter in conjunction with levying a $100 million fine, Wells Fargo fired 5,300, people including four executives. The matter also ultimately cost then-CEO John Stumpf his job in October, as the organization’s reputation was dinged rather harshly and a clear message of a clean sweep had to be made.

That damage was evident in last year’s fourth quarter earnings, which were notably lower — and lower than expected — with would-be customers steering clear of the bank’s services.

Consumers were surprisingly forgive-and-forget, with this year’s Q1 numbers seemingly back on a growth track. In March of this year, though, it was discovered that Wells Fargo may have actually opened 3.5 million bogus accounts rather than the initially suspected 2 million, upending a budding effort to restore its goodwill with consumers as well a shareholders.

Looking Ahead for WFC Stock

Amazingly enough, the drama of the account-opening scandal may still not be in the rear-view mirror.

At this week’s routine congressional testimony from Fed Chairperson Janet Yellen, Senator Elizabeth Warren queried Yellen why she didn’t fire Wells Fargo’s Board of Directors (yes, Yellen has that authority, even if doing so could prove even more problematic) after the scandal was revealed. As it turns out, that possibility is still on the table. The Federal Reserve, which is the ultimate regulator for all of the nation’s bank, is still gathering information regarding the matter, and will take that action if deemed necessary.

In the meantime, analysts are — or were — calling for a full-year profit of $4.14 per share of WFC stock on revenue of $90.51 billion. Both would be up from 2016’s top line of $88.27 billion and bottom line of $3.99 per share, suggesting the account-opening scandal isn’t as much of a problem as the headlines might suggest.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/wells-fargo-and-co-wfc-stock-q2-earnings/.

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