Wells Fargo’s Earnings Are the Least of Its Problems

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Wells Fargo & Co. (NYSE: WFC) reported first-quarter fiscal 2019 results before markets opened Friday. The banking giant posted diluted earnings per share (EPS) of $1.20 on revenue of $21.6 billion. In the same period a year ago, Wells Fargo said it had EPS of $0.96 on revenue of $21.9 billion. Net income rose from $5.1 billion a year ago to $5.9 billion in the latest quarter. First-quarter results also compare to the consensus estimates for EPS of $1.09 on revenue of $21.01 billion.

Net interest income in the quarter increased by $73 million year over year to $12.3 billion. Net interest dropped $333 million sequentially, which the bank attributed to two fewer days in the quarter, along with balance sheet mix and repricing.

Non-interest income rose $962 million year over year to $9.3 billion and reflected higher market-sensitive revenue and mortgage banking income partially offset by lower trust and investment fees and lower fees and other income.

Wells Fargo’s Tier 1 common equity ratio (fully phased-in) is 11.9%.

Non-interest expenses rose sequentially by $577 million to $13.9 billion, primarily due to seasonally higher employee benefits and incentive compensation and deferred compensation expense.

Net loan charge-offs dropped from $741 million in the first quarter of 2018 to $695 million, or an annualized rate of 0.3%. Commercial charge-offs rose from $78 million a year ago to $145 million, while consumer losses fell from $663 million to $550 million. Auto loan charge-offs dropped from $208 million in the year-ago quarter to $91 million.

Chief Financial Officer John Shrewsberry said:

Our financial results included continued strong credit performance and high levels of liquidity. In addition, our continued de-risking of the balance sheet and consistent level of profitability have resulted in capital levels well above our regulatory minimum. As a result, we returned $6.0 billion to shareholders through common stock dividends and net share repurchases in the first quarter, up 49% from a year ago. Returning excess capital to shareholders remains a priority. While our expenses in the first quarter included typically higher personnel expense, we remain committed to, and are on track to achieving, our 2019 expense target.

The elephant in the report, though, is a permanent replacement for Tim Sloan who abruptly retired as chief executive officer late last month. The new permanent CEO’s first job will be to get the bank into compliance with regulators’ demands that it clean up its act so that the Federal Reserve will lift its current cap on the bank’s ability to grow its assets. Interim CEO Allen Parker’s comments in Friday’s release are simply a placeholder until the bank appoints a permanent leader to attack the issues limiting growth.

The bank did not offer guidance in its press release, but consensus estimates call for second-quarter EPS of $1.21 on revenues of $21.25 billion. The EPS estimate for the 2019 fiscal year is $4.89. and revenues are forecast at $85.15 billion.

Shares traded up about 2.2% to $48.81 early Friday. The 52-week range is $43.02 to $59.53, and the 12-month consensus price target was $56.44 before results were announced.

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