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Wells Fargo (WFC) Q1 Earnings Beat on Fee Income Growth

Solid mortgage and capital markets performance supported Wells Fargo’s WFC first-quarter 2021 earnings of $1.05 per share, which surpassed the Zacks Consensus Estimate of 69 cents. Also, the bottom line compared favorably with the prior-year quarter figure of 60 cents.

Results included the impact of $1.6 billion decline in allowance for credit losses, backed by an improving economic environment and lower net charge-offs. Also, it includes $208 million gain on the sale of student loans and $104 million write-down on related goodwill.

Strong mortgage banking performance, improved trading and higher investment banking fees, and rise in asset-based fees in the wealth and investment management unit supported the bank. Further, a net benefit to provision of credit losses was reported during the quarter. However, reduced net interest income on lower rates and higher costs negatively impacted the results.

In the first quarter, net income applicable to common stock came in at $4.4 billion compared with the $42 million recorded in the prior-year quarter.

The quarter’s total revenues were $18.1 billion, outpacing the Zacks Consensus Estimate of $17.6 billion. Further, the top line was above the year-ago quarter’s $17.7 billion.

Furthermore, quarterly revenue generation at the business segments declined on a year-over-year basis. The Consumer Banking and Lending segment’s total quarterly revenues jumped slightly, while Commercial Banking revenues were down 12%. Revenues in the Corporate and Investment Banking as well as the Wealth and Investment Management units rose 7% and 8%, respectively.

Fee Income Leads to Higher Revenues, Costs Rise

Wells Fargo’s net interest income in the first quarter came in at $8.8 billion, down 22% year over year due to lower interest rates, loan balances and higher mortgage-backed securities premium amortization. Furthermore, net interest margin shrunk 53 basis points (bps) to 2.05%.

Non-interest income at Wells Fargo came in at $9.3 billion, up 45% year over year. Higher cards fees, mortgage banking, net gains from equity securities and trading activities, investment advisory and other asset-based fees were partially offset by lower deposit-related fees and other income.

As of Mar 31, 2021, total loans were $861.6 billion, down 3% sequentially. Lower commercial and consumer loans led to the fall. Total deposits came in at $1.4 trillion, up 1% from the prior quarter.

Non-interest expense at Wells Fargo was $14 billion during the first quarter, up 7% year over year. Higher technology, telecommunications and equipment expenses, personnel and occupancy costs were partly muted by lower operating losses along with advertising and promotion expenses.

The company’s efficiency ratio of 77% was above the 74% recorded in the year-ago quarter. A rise in efficiency ratio indicates a fall in profitability.

Credit Quality: A Mixed Bag?

Wells Fargo’s credit quality metrics were a mixed bag during the March-ended quarter. Allowance for credit losses, including the allowance for unfunded commitments, totaled $18 billion as of Mar 31, 2021, up 50% year over year. Non-performing assets increased 28% to $8.2 billion in the first quarter from $6.4 billion reported in the year-earlier period.

Net charge-offs were $523 million or 0.24% of average loans in the reported quarter, down 44% from $941 million (0.38%). Provision for credit losses was a net benefit of $1 billion against the provision of $4 billion reported in the year-ago quarter.

Healthy Capital Position

Wells Fargo has maintained a sturdy capital position. Its Tier 1 common equity under Basel III (fully phased-in) increased to $139.6 billion from $134.7 billion witnessed in the prior-year quarter. The Tier 1 common equity to total risk-weighted assets ratio was estimated at 11.8% under Basel III (fully phased-in) as of Mar 31, 2021, up from 10.7%.

Book value per share increased to $40.34 from $39.71 recorded in the comparable period last year.

Return on average assets was 0.99%, up from the prior-year quarter’s 0.13%. Return on average equity was 10.6%, up from the year-ago quarter’s 0.1%.

As of Mar 31, 2021, eligible external total loss absorbing capacity as a percentage of total risk-weighted assets was 25.2% compared with the minimum requirement of 23.3%.

Capital Deployment Activities

Wells Fargo repurchased 17.2 million shares or $596 million in the first quarter.

Our Viewpoint

Wells Fargo is focused on maintaining its financial position despite a number of legal tensions. In addition, the company is working on strategic initiatives, which might help regain the confidence of its clients and shareholders.

Solid demand for mortgage banking due to low rates and momentum in capital markets activities might support the bank’s performance. Nevertheless, top-line headwinds, such as lower net interest income woes, are expected to prevail amid the continued coronavirus crisis.

Wells Fargo & Company Price, Consensus and EPS Surprise

Wells Fargo & Company price-consensus-eps-surprise-chart | Wells Fargo & Company Quote

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Date of Other Major Banks

Bank of America BAC and Citigroup C are scheduled to come out with quarterly numbers on Apr 15, while PNC Financial PNC is set to report on Apr 16.

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