Wells Fargo Sags as Expense Growth Tops Profit Growth

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Wells Fargo & Co. (NYSE: WFC) reported fiscal 2017 first-quarter results before markets opened Thursday. The banking giant posted diluted earnings per share (EPS) of $1.00 on revenue of $22 billion. In the same period a year ago, Wells Fargo reported EPS of $0.99 on revenue of $21.58 billion. Net income rose from $5.27 billion a year ago to $5.46 billion in the quarter. First-quarter results also compare to the consensus estimates for EPS of $0.97 on revenue of $22.31 billion.

Net interest income in the quarter declined by $102 million sequentially to $12.3 billion. The bank attributed the decline to two fewer days in the quarter. Net interest margin was “stable” sequentially at 2.87%, which Wells Fargo attributed to higher interest rates, a reduction in short-term market funding and average balance growth in investment securities. Lower trading income, higher deposit and long-term debt balances, and lower income from various other sources offset the positives.

Noninterest income rose to $9.7 billion, driven by higher other income and higher market-sensitive revenues, particularly in trading. Mortgage banking income, investment banking fees and commercial real-estate brokerage commissions offset the gains.

Wells Fargo’s tier 1 common equity ratio (fully phased-in) of Basel III is 11.2%.

Noninterest expenses rose sequentially from $13.2 billion to $13.8 billion due to increased compensation expense and higher employee benefits.

Net loan charge-offs fell from $905 million in the fourth quarter of 2016 to $805 million, or an annualized rate of 0.34%. Commercial charge-offs totaled 0.11% (down sequentially from 0.2%) and consumer charge-offs totaled 0.59% (up sequentially from 0.56%).

The bank’s CEO, Tim Sloan, said:

Wells Fargo continued to make meaningful progress in the first quarter in rebuilding trust with customers and other important stakeholders, while producing solid financial results. We have taken significant actions throughout the company to date and we are committed to building a better bank as we move Wells Fargo forward.

CFO John Shrewsberry added:

Expenses were elevated compared with last quarter, driven by typically-higher first quarter personnel-related expenses. Credit results improved, with lower net charge-offs and nonaccrual loans, and we benefited from lower income tax expense. The balance sheet remained strong with high levels of capital and liquidity, and record deposits.

The bank did not offer guidance in its press release, but consensus estimates call for second-quarter EPS of $1.05 on revenues of $22.88 billion. The EPS estimate for the 2017 fiscal year is $4.21, and revenues are forecast at $91.692.08 billion.

Shares traded down about 1.5% in Thursday’s premarket to $52.35. The current 52-week range is $43.55 to $59.99. The 12-month consensus price target was $59.07 before results were announced.