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Wells Fargo Earnings: What Happened

Key points to remember

  • EPS was $0.64 versus analysts’ expectation of $0.58.
  • Revenues fell short of analysts’ expectations.
  • Provisions for loan losses were lower than the level estimated by analysts.
  • The bank’s board approved an increase in share buybacks.

What happened

Wells Fargo released its fourth quarter fiscal 2020 financial results, posting an EPS increase that exceeded analysts’ expectations. Revenues, however, fell short of expectations and fell for the fifth consecutive year-over-year quarter. The bank’s loan loss reserve fell slightly as loan loss provisions were negative, contrary to analysts’ expectations for an increase. Wells Fargo’s board of directors has approved an increase in common stock repurchases.

(Below is the original Earnings Snapshot from Investopedia, published January 14, 2021.)

What to look for

Wells Fargo & Co. (WFC) is among several other major U.S. banks that have been given the green light to resume share buybacks in the first quarter of 2021 by the Federal Reserve. The U.S. central bank has lifted its buyout ban on the most profitable lenders, believing their capital reserves are sufficient to sustain potentially hundreds of billions of dollars in loan losses related to the COVID-19 pandemic.

Investors will be watching closely to see how Wells Fargo has weathered the economic fallout from the pandemic when the bank reports its results on January 15, 2021 for the fourth quarter of fiscal 2020. Analysts forecast both earnings perPES) and revenue was down from the same three-month period a year ago.

But investors will also be keeping a close eye on Wells Fargo’s loan loss provisions, a key metric in the banking industry showing how much a bank is setting aside to protect against bad loans. The more money he sets aside to protect against loan losses, the less money he has available to return to shareholders via buyouts. Analysts expect the company to increase its loan loss provisions sharply from the year-ago quarter, but not as much as in the first two quarters of the year.

Wells Fargo shares have lagged the market over the past year. The stock’s performance gap widened as it failed to join the market’s rebound from last year’s crash that began in late February 2020. The stock continued to decline until at the end of October, but has been gaining ground ever since. Wells Fargo shares have provided a -32.5% total return over the past 12 months, well below the S&P 500 total return of 15.9%.

Source: Trading View.

The poor financial results of the past year weighed on the stock. Wells Fargo reported a 54.7% decline in EPS in the third quarter of fiscal 2020. Revenue fell 14.3% from the same three-month period a year ago. This is the fourth consecutive quarter of declining revenues. The bank noted that historically low interest rates lowered its net interest incomethe difference between the interest it earns on the loans it makes and the interest it pays on customer deposits.

In the second quarter of fiscal 2020, Wells Fargo posted a loss per share of $0.66, its first loss in at least 15 quarters. Revenue fell 17.4% from the prior year quarter. In the first quarter, EPS fell 99.2% and revenue fell 18.0%.The negative impact of the pandemic has hurt financial results, compounding the bank’s recent financial costs related to fake accounts scandal that broke in 2016. This scandal cost the bank billions of dollars and tarnished its reputation.

Analysts expect continued financial deterioration for Wells Fargo in the fourth quarter of 2020, albeit less severe than in recent quarters. EPS is expected to fall 2.8% while revenue falls 8.9%, which would be the fifth consecutive quarter of revenue decline. For the full year 2020, analysts expect EPS to fall 91.1% and revenue 14.6%, the biggest declines for both in five years.

Wells Fargo Key Metrics
Estimate for the fourth quarter of 2020 (fiscal year) Q4 2019 (fiscal year) Q4 2018 (fiscal year)
Earnings per share ($) 0.58 0.60 1.21
Revenue ($B) 18.1 19.9 21.0
Provisions for loan losses ($M) 881.9 644.0 521.0

Source: visible alpha

As mentioned above, investors will also be watching Wells Fargo developments closely. provisions for loan losses, which the bank calls provisions for credit losses. This key indicator shows how much cash the bank is adding to its loan loss reserves to cover bad debts. As a charge to the income statement, provisions for loan losses reduce profits. The increase in loan loss provisions suggests that a bank anticipates an increase in loan defaults. Banks across the United States have dramatically increased their loan loss provisions during the pandemic in anticipation of more households and businesses defaulting on debt, reducing overall profits of the sector.

Wells Fargo is no exception. The bank had already increased its loan loss provisions by 23.6% in the fourth quarter of fiscal 2019, just before the COVID-19 pandemic began to sweep through the United States and hammer the economy. In response, Wells Fargo increased its loan loss reserves by 374.0% in the first quarter of fiscal 2020 and then by 1,795.4% in the second quarter. While the bank only modestly increased its reserves in the third quarter, analysts expect a further increase of 36.9% in the fourth quarter of fiscal 2020. For the full year 2020, loss provisions on bank loans are expected to increase by 464.6%. The anticipation of large future loan losses by Wells Fargo portends further economic difficulties.

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