Wells Fargo & Co (WFC) Keeps Earnings Streak Alive

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Wells Fargo & Company (WFC) earned $1.00 per share in fourth-quarter 2013, thereby achieving earnings growth for the sixteenth consecutive quarter. Results improved from 99 cents earned in the prior quarter and 91 cents in the year-ago quarter. The reported figure also beat the Zacks Consensus Estimate by 2 cents.

For the year ended 2013, earnings per share were $3.89, up significantly by 53 cents when compared with the prior-year. Results also outpaced the Zacks Consensus Estimate by 2 cents.

Total loans and deposits grew and the company reflected prudent expense management. Moreover, a strong capital position and returns on assets and equity acted as positives.

Wells Fargo also reported $600 million in reserve release (pre-tax), attributable to improved credit performance. However, the company experienced a fall in top line owing to lower non-interest income.

Fourth-quarter net income applicable to common stock came in at $5.4 billion, up 1.9% sequentially and 11% year over year. For the year ended 2013, net income applicable to common stock was $20.9 billion, up 16% year over year.

The quarter’s total revenue came in at $20.7 billion, outpacing the Zacks Consensus Estimate of $20.6 billion. However, revenues declined 5.5% year over year.

Revenues for the year ended 2013 were $83.8 billion, which marked a year-over-year decrease of 2.7%. Additionally, it lagged the Zacks Consensus Estimate of $84.1 billion.

Furthermore, segment-wise, on a year-over-year basis, Community Banking and Wholesale Banking segments’ total revenue fell 10.9% and 0.3% respectively, while the Wealth, Brokerage and Retirement segment reported a rise of 9.7%.

Performance in Detail

Wells Fargo’s net interest income for the quarter came in at $10.8 billion, up 2% year over year. Increased interest income from trading assets and investment securities, along with lower funding costs, aided the results. However, net interest margin decreased 30 basis points year over year to 3.26%.

Non-interest income at Wells Fargo came in at $9.9 billion, down 13% on a year-over-year basis, mainly due to fall in mortgage banking revenues as well as other income. These negatives were partially mitigated by increases in net gains from trading activities, card fees as well as trust and investment fees.

As of Dec 31, 2013, total loans were $825.8 billion, increasing 3.3% on a year-over-year basis. Growth in commercial and industrial, auto, foreign, credit card and commercial real estate mortgage portfolio contributed to the rise. Average total deposits were $1.1 trillion, up 9% from the prior-year quarter. Strong commercial and consumer growth aided the positive results.

Non-interest expense at Wells Fargo was $12.1 billion, down 6% from the prior-year quarter. The fall in expenses was primarily attributable to reduction in core deposit and other intangibles, FDIC and other deposit assessments as well as commission incentive compensation and other expenses.

The company’s efficiency ratio of 58.5% was below 58.8% in the prior-year quarter and was within the targeted efficiency ratio range of 55%–59%. A fall in efficiency ratio indicates rise in profitability. Wells Fargo hopes to maintain its targeted efficiency ratio range in the first quarter of 2014.

Credit Quality

Wells Fargo reported improved credit quality metrics in the quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $15.0 billion as of Dec 31, 2013, waning from $17.5 billion as of Dec 31, 2012.

Net charge-offs were $963 million or 0.47% of average loans in the reported quarter, down from the prior-year quarter net charge-offs of $2.1 billion (1.05%). Nonperforming assets fell to $19.6 billion in the quarter from $24.5 billion in the prior-year quarter. Moreover, provision for credit losses were $363 million against $1.8 billion in the prior-year quarter.

Capital Position

Wells Fargo has maintained a solid capital position. The company purchased 30 million shares of its common stock in the fourth quarter. Moreover, an additional purchase of estimated 11.3 million shares was conducted through a forward buyback transaction, which is anticipated to be complete in first-quarter 2014.

Notably, during the year ended 2013, Wells Fargo returned $11.4 billion to shareholders through dividends and share repurchases.

Wells Fargo’s Tier 1 common equity under Basel I increased $14.5 billion year over year to $123.5 billion. The Tier 1 common equity to total risk-weighted assets ratio was 10.82% under Basel I as of Dec 31, 2013 compared with 10.12% in the prior-year quarter.

The company’s estimated Tier 1 common equity ratio was an estimated 9.78% under the latest Basel III capital proposals. The Tier 1 leverage ratio was 9.60% as of Dec 31, 2013, up from 9.47% as of Dec 31, 2012.

Tier 1 capital ratio was 12.33% as of Dec 31, 2013 compared with 11.75% as of Dec 31, 2012. Book value per share increased to $29.48 from $27.64 in the prior-year quarter.

Our Viewpoint

The positive developments of the sector and gradually improving macro economy helped the banking behemoth to maintain its impressive track record.

On the fundamental side, Wells Fargo’s growth plans have historically included a large number of acquisitions, out of which the Wachovia acquisition in Dec 2008 was the largest. Notably, in 2012, the company completed three acquisitions with combined total assets of $4.5 billion.

Additionally, Wells Fargo announced consecutive dividend increases over the past few years with the latest hike of 20% being announced in Apr 2013.

Though there are concerns related to the impact of legal issues, equity-centric activities in the U.S. and continued recovery in the capital markets are expected to support Wells Fargo’s results in the coming quarters.

We believe that in the long term, investors will not be disappointed with their investment 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 the company to expand its business and boost profitability.

In our view, long-term investors who can absorb risks related to economic and regulatory fluctuations can expect decent earnings growth for Wells Fargo in the future. Solid capital levels, disciplined expense management as well as expected improvement in credit quality will support its profit figures. Additionally, the company’s stress test clearance in March and the subsequent dividend hike, along with its strategy to increase share buybacks raised investors’ confidence.

Nevertheless, we expect top-line headwinds to persist, given the protracted economic recovery. Moreover, a low interest rate environment would keep Wells Fargo’s margins under pressure. The company’s lingering legacy mortgage issues is also a concern. With the thrust of banking regulations, there will be pressure on fees and loan growth.

Wells Fargo and JPMorgan Chase & Co. (JPM), with exposure in almost all banking businesses, are the first among the banking majors to report fourth-quarter earnings. The earnings releases of these banks should be an indicator of the performance of the key banking sector.

Among other Wall Street giants, Citigroup Inc. (C) and Goldman Sachs Group, Inc. (GS) are slated to report fourth-quarter earnings results on Jan 16.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold).

CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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