If Monday’s mixed quarterly report from Citigroup (NYSE:C) is any indication of what Wells Fargo (NYSE:WFC) has in store for Tuesday, owners of Wells Fargo stock may want to keep their expectations in check.
On Monday morning, mega-bank Citigroup announced it had turned $17.12 billion worth of fourth quarter revenue into a per-share operating profit of $1.61 per share. Though earnings were well up from a year-ago figure of $1.28 and better than the expected $1.55, the top line fell 2%, coming up short of the $17.55 billion analysts had been modeling. The key culprit was a sharp slowdown in bond trading, which struggled in the shadow of mostly-bearish volatility and widening spreads. All told, fixed income revenue fell 21% last quarter.
Wells Fargo likely fared about the same, or perhaps not even as well given that it’s still handcuffed by the Federal Reserve.
The Wells Fargo saga has dragged on far longer than most had hoped.
That saga, of course, is an account-opening scandal that came to light in two tranches in 2017. Early that year it had been revealed that nearly 2 million unauthorized credit card or checking accounts had been opened by bank employees so they could meet lofty sales expectations, but by August of that year, another 1.4 million fake accounts had been uncovered.
The fallout was tremendous. Not only did new distrust steer would-be consumers away from Wells Fargo, the bank saw more than a handful of customers leave.
Regulators weren’t pleased either. The Federal Reserve has put new pressure on the bank — and WFC stock — by ruling in February of last year that the bank wouldn’t be allowed to grow its asset base (and therefore be unable to grow revenue and earnings in that way) until the Fed was satisfied Wells Fargo had fully resolved the problems that led to the scandal.
As of December, the Fed was still not satisfied.
Despite its roadblocks, Wells Fargo has mustered some forward progress of late. Its third-quarter income of $1.16 per share came up just short of expectations of $1.17 per share of Wells Fargo stock, but net income grew by 33% year-over-year. Revenue of $21.9 billion was a bit better than expected, while net interest margins were up slightly from Q2’s 2.93% to 2.94%. Returns on assets and the bank’s equity also improved during the third quarter of last year, even if only by a modest amount.
Perhaps most encouraging of all, checking accounts grew 1.7%, suggesting Wells Fargo had won back some public trust.
WFC Earnings Outlook for Q4
Matters have changed since Q3, however. Namely, rising interest rates have further crimped demand for all-important mortgage applications.
Falling mortgage loan rates, which reached their lowest level in eight months earlier in January, suggests some would-be homebuyers will now be willing to come back to the table. But with a volatile stock market and an unclear economic picture, even cheaper borrowing rates may not be enough to boost the bank’s loan business without shrinking net profit margins. Wells Fargo conceded with its Q3 earnings announcement an ‘overcapacity’ within its mortgage division, which may be one of the underpinnings for 5% to 10% reduction in its employee headcount within three years.
Those notably lower interest rates didn’t apply for a good part of Q4 anyway.
In the meantime, though Citigroup’s bond-trading fell, its equity-trading business was up 18% year-over-year. That activity may have mostly been its customers fleeing stocks, however, with many of them now sitting on the sidelines where it’s more difficult to extract revenue from them. Another round of shakeups in how Wells Fargo’s brokers and advisors are paid may have only lead to fresh challenges on this front last quarter, which in turn could have contributed to narrowing margins.
As of the latest look, analysts are modeling a fourth-quarter profit of $1.19 per share of WFC stock, up from the year-ago bottom line of 97 cents per share. Sales are expected to roll in at $21.75 billion, down 1.4% from Q4-2017’s tally of $22.05 billion. Those figures largely mimic the ones Citigroup reported on Monday, although Tuesday morning’s report from JPMorgan Chase (NYSE:JPM) should be considerably better.
Bottom Line for Wells Fargo Stock
Wells Fargo is a name most consumers — and investors — have been willing to forgive for past transgressions. But the benefit of that forgiveness is limited by the backdrop. So how Wells Fargo stock responds to Tuesday morning’s report will be as much a function of how investors feel about peers and rivals JPMorgan Chase and Citigroup as it will be about Wells Fargo and the cap the Fed still has on its asset base.
To that end, the pressure is on Wells Fargo to prove it’s fully shrugged off its past and is thriving in this lackluster environment.
The one thing working in favor of Wells Fargo stock? It’s dirt cheap at a forward-looking P/E of 9.5.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.