Wells Fargo & Company’s (WFC) first quarter
2012 earnings of 75 cents per share were 2 cents ahead of the Zacks
Consensus Estimate. Results improved from earnings per share of 73
cents in the prior quarter and 67 cents in the year-ago quarter.
First quarter net income applicable to common stock came in at $4.0
billion, up 3% sequentially and 13% year over year.
Wells Fargo’s results were primarily driven by a higher top
line. The company reported a growth in mortgage banking revenue. It
also reported $400 million (pre tax), attributable to improved
portfolio performance. However, an increase in operating expenses
was on the downside.
The quarter’s revenue came in at $21.6 billion, which was above
the Zacks Consensus Estimate of $20.5 billion. Revenue was also up
5% sequentially and 6% year over year. The sequential improvement
in revenue at Wells Fargo was driven by a growth in non-interest
income while net interest income remained stable. Notably, the
company experienced solid mortgage banking and market sensitive
revenues in the quarter.
Furthermore, segment wise, on a sequential basis, Wholesale
Banking reported an 11% growth in revenues while the Community
Banking and Wealth, Brokerage and Retirement segments reported
rises of 3% and 1%, respectively.
Performance in Detail
Wells Fargo’s net interest income for the quarter came in at
$10.9 billion, flat sequentially. Average earning assets were
unchanged from the prior quarter. However, net interest margin
advanced 2 basis points sequentially to 3.91%. Disciplined deposit
pricing and redistribution of short-term investments into long-term
securities offset the runoff of higher yielding loans and
investments.
Non-interest income at Wells Fargo came in at $10.7 billion, up
11% from the prior quarter. The increase was driven by a growth in
mortgage banking and market sensitive revenues as well as trust and
investment fees.
As of March 31, 2012, total loans were $766.5 billion, flat
sequentially. While the company experienced a growth in loans in
the core portfolio, it was offset by continued run-off in the
non-strategic/liquidating portfolio. Average core deposits were
$870.5 billion, up 3% (annualized) from the prior quarter and 9%
from a year ago.
However, non-interest expense at Wells Fargo was $13.0 billion,
up 4% from the prior quarter. The rise in expenses reflects higher
personnel costs and increased revenue. The company incurred higher
commissions and incentive compensation, reflecting higher
revenue-related mortgage banking, retail brokerage, and insurance
expenses.
Notably, the company currently projects a $500-$700 million
decline in second quarter 2012 expenses due to the elimination of
merger expenses and the absence of the first quarter seasonally
higher personnel costs.
However, for higher-than-expected revenues, mainly mortgage
banking and acquisition-related revenues, Wells Fargo currently
aims fourth quarter 2012 non-interest expense of around $11.25
billion, which represents the upper end of the formerly disclosed
range of $10.75–$11.25 billion.
Credit Quality
Credit quality was mixed in the quarter. Though the company
experienced a drop in chare-offs and provisions, nonperforming
assets reported an increase in the reported quarter. On the whole,
the rate of improvement this year is expected to be slow with
losses approaching normalized levels. The company also expects
future reserve releases in 2012 in case the economy improves
significantly.
Wells Fargo’s allowance for credit losses, including the
allowance for unfunded commitments, totaled $19.1 billion as of
March 31, 2012, down from $19.7 billion as of December 31,
2011.
Net loan charge-offs were $2.4 billion or annualized 1.25% of
average loans, down from $2.6 billion or annualized 1.36% in the
prior quarter. Provision for credit losses fell 2% sequentially to
$2.0 billion in the reported quarter.
However, nonperforming assets ended the quarter at $26.6
billion, up from $26.0 billion in the prior quarter. Non-accrual
loans advanced to $22.0 billion from $21.3 billion in the prior
quarter. The increase was due to industry-wide supervisory guidance
related to the junior lien portfolio.
Capital Position
Wells Fargo reported an increase in capital in the reported
quarter. The Tier 1 leverage ratio was 9.35% as of March 31, 2012,
up from 9.03% as of December 31, 2011. The Tier 1 common equity
ratio was an estimated 7.81% as of March 31, 2012 under the Basel
III capital proposals. Tier 1 capital ratio was 11.74% as of March
31, 2012 compared with 11.33% as of December 31, 2011.
Moreover, book value per share improved to $25.45 from $24.64 in
the prior quarter and $23.18 in the prior-year quarter.
The company redeemed $875 million of trust preferred securities
with a coupon of 6.38%. It also bought back around 8 million shares
of its common stock that was basically related to the settlement of
a forward repurchase contract entered into in the fourth quarter of
2011. Moreover, the company also paid quarterly dividends of 22
cents per share in the first quarter.
Acquisition and Integration Update
Wells Fargo successfully completed the Wachovia merger
integration in the reported quarter. Also, the company announced
the acquisition of BNP Paribas’s North American energy lending
business. This is expected to be accomplished in April 2012 and
includes approximately $3.9 billion of loans outstanding.
Peer Performance
Concurrent with Wells Fargo, JPMorgan Chase &
Company (JPM) also kicked off the earnings season for the
banking sector by reporting its earnings today. Similar to Wells
Fargo, JPMorgan also posted higher-than-expected earnings per share
of $1.31 based on improved top line.
Next week, the major Wall Street Banks reporting includes
Citigroup Inc. (C) which will report on April
16, while Goldman Sachs Group Inc. (GS) will
report on April 17 and Bank of America Corporation
(BAC) on April 19.
Our Viewpoint
We believe that over the long term, investors should not be
disappointed with their investments in Wells Fargo given its
diverse geographic and business mix which enables it to sustain
consistent earnings growth. Going forward, we believe that
strategic acquisitions will help expand Wells Fargo’s business and
improve its profitability.
In fact, Wells Fargo’s growth plans have historically included a
large number of acquisitions, Wachovia being the largest in
December 2008. The company also acquired substantially all of the
US-based operating assets of Foreign Currency Exchange Corporation,
a wholly owned subsidiary of the Bank of Ireland
Group (IRE), in an effort to expand its international
banking capabilities.
Of late, the company accomplished the purchase of Burdale
Financial Holdings Limited (Burdale) and the portfolio of Burdale
Capital Finance Inc. from Bank of Ireland. The deal would enable
Wells Fargo to broaden its horizon and expand its asset-based
lending business into the UK, which in turn would help the company
to serve its US-based customers doing business in the UK.
Though the stock is not undervalued at this moment, we believe
that long-term investors, who can absorb the risks related to
economy and regulations, can expect a decent growth in Wells
Fargo’s earnings in future. Solid capital levels, expense
management as well as improved credit quality will also support its
profit figures.
Notably, Wells Fargo passed the stress test of the Federal
Reserve with flying colors in March. Following the approval of the
capital plan by the Federal Reserve, Wells Fargo has hiked its
dividend by 10 cents to 22 cents per share.
The capital plan also includes an increase in share repurchase
activity in 2012 compared with the prior year. It also incorporates
selective redemptions of trust preferred securities that no longer
count as Tier 1 Capital under the Dodd-Frank Act. Such efforts have
a positive impact on the stock price.
Yet we believe the top-line headwinds would persist, given the
protracted economic recovery. Plus, a low interest rate environment
would keep its margin under pressure. Wells Fargo’s unrelenting
legacy mortgage issues also remain a concern. With the thrust of
new banking regulations, there will be pressure on fees and loan
growth could remain feeble.
Wells Fargo currently retains a Zacks #2 Rank, which translates
into a short-term Buy rating. Considering the fundamentals, we also
maintain a Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
IRELAND BK-ADR (IRE): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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