Wells Fargo and Company (WFC)

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Wells Fargo earnings: Here's what to expect from the embattled lender

MARKETWATCH 11:54 AM ET 10/12/2016
Symbol Last Price Change
WFC 45.535 +0.085 (+0.19%)
QUOTES AS OF 11:55:50 AM ET 10/12/2016
All eyes are on the San Francisco bank after its account-opening scandal

Wells Fargo & Co. (WFC) is scheduled to report third-quarter results on Friday before the start of trading, and investors will expect earnings to be weaker than the year earlier period as the embattled lender fights to restore its reputation after a bruising scandal erupted over its sales practices.

Early last month, the giant San Francisco-based lender was slapped with a $185 million fine for "widespread illegal" sale tactics, in which its employees opened millions of credit-card and deposit accounts without customers' knowledge. Wells Fargo(WFC) neither admitted nor denied wrongdoing in a consent order it signed with the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and a city attorney, but its actions have drawn a firestorm of outrage and sullied its once-stellar reputation, putting Chairman and CEO John Stumpf, and the rest of its top brass, squarely on the hot seat.

The scandal, which has resulted in the firing of some 5,300 low-level employees, state censures, a request for a Justice Department probe by Senate Democrats (http://www.marketwatch.com/story/democrats-call-for-criminal-probe-into- senior-wells-fargo-executives-2016-10-05), the forfeiting of $41 million in future compensation by Stumpf after twice receiving tongue-lashings on Capitol Hill, has Wells Fargo(WFC) in major damage control mode.

Read: Wells Fargo(WFC) CEO's $41 million ranks only third among executive-pay clawbacks, forfeitures (http:// www.marketwatch.com/story/wells-fargo-ceos-41-million-pay-forfeit-is-neither-the-biggest-nor-the-toughest-clawback-2016- 09-29)

Although those issues may not have a sizable impact on the bank's quarterly results, they are sure to be the focus of Wall Street.

Here's what to look out for from the bank which recently lost its crown as the biggest (http://www.wsj.com/articles/ j-p-morgan-leapfrogs-over-wells-fargo-in-market-capitalization-1473782816)U.S. bank by market capitalization for the first time in 3 1/2 years to J.P. Morgan Chase & Co. (JPM):

Earnings:

Wells Fargo (WFC) is expected to report per-share earnings of $1.01, according to analysts polled by FactSet, down from $ 1.14 in the same period a year ago.

Estimize, which crowdsources estimates from sell-side and buy-side analysts, academics and others, is expecting EPS of $1.02.

Revenue

The retail lender is forecast to report quarterly revenue of $22.237 billion, down from $23.132 billion a year ago, according to FactSet data. Estimize is expecting revenue of $22.036 billion.

Share price

The retail lender's shares have underperformed peers since news of the scandal broke on Sept. 8. Wells Fargo's(WFC) shares are off about 9% in that period, while the S&P 500 index has lost about 2%.

Over the past year, its stock is down a whopping 16.4%--representing the steepest decline among the six largest banks. The following chart shows the year-to-date performance of Citigroup Inc. (C), Bank of America Corp. (BAC), J.P. Morgan, Morgan Stanley (MS) Goldman Sachs Group Inc. (GS) and Wells Fargo(WFC) (as of the close of trade Oct. 11):

Moreover, the financial institution also is the weakest performer over the year within the KBW Bank Index (KBWB), which is an index of 24 large U.S. banks.

Scandal and other issues

Typically a litmus test for the health of the U.S. economy given its size, Wells Fargo's(WFC) overall quarterly results in everything from mortgage origination to how effectively it is able to reduce costs and increase margins will take a back seat to questions about its scandal.

"This is the first call that we analysts will have to ask questions of the CEO," prominent bank analyst Mike Mayo at CLSA told MarketWatch. Mayo said Wells Fargo(WFC) has been too late in addressing its cross-selling debacle. Many banks shop additional products and services to customers, particularly amid what has been a protracted period of ultralow interest rates.

"Given that we have a flat yield curve [banks were] pushing what's on the retail side," Paul Miller, bank analyst at FBR Capital Markets, told CNBC Wednesday morning.

But to many observers, Wells Fargo's(WFC) cross-selling practices highlight a high-pressure environment that may have fostered a culture of fraud by rewarding low-level employees bonuses based on hard-to-achieve sales goals.

Mayo said he plans on asking. "Does the culture need to change, yes or no? Does Stumpf still think cross-selling is OK?"

On Monday, senior executives, including Stumpf and the bank's No. 2 Tim Sloan, held an hour-long call to discuss a game plan to recover from its self-inflicted problem, according to The Wall Street Journal (http://www.marketwatch.com/ story/wells-fargo-outlines-strategy-to-get-past-scandal-2016-10-11). As expected, executives said new retail banking business in the third quarter has suffered in the wake of the scandal and the bank expects things to get worse before it gets better, especially as a number of states have said they plan on penalizing the 164-year-old lender by not doing business with it--at least temporarily.

"To say the last month has been difficult is an understatement," Sloan said on the Monday call, according to WSJ.

Scott Siefers, bank analyst at Sandler O'Neill, told MarketWatch that he will be looking for how much, if any, the bank has raised to address additional fines or to boost marketing efforts.

Read: Wells Fargo(WFC), Deutsche Bank woes seen a bigger issue for bank investors than Fed policy (http:// www.marketwatch.com/story/wells-fargo-deutsche-bank-woes-seen-a-bigger-issue-for-bank-investors-than-fed-policy-2016-10- 11)

"'What kind of additional incremental costs will Wells Fargo(WFC) have to incur, such as advertising and brand awareness?' That's an important question," said Siefers. "You know it is going to be higher, it is just the order of magnitude," he said.

Overall, it is a stunning reversal of fortune for an institution that has traditionally been held up as the paragon of good banks and as a darling of billionaire investor Warren Buffett, who boasts a 9.5% stake in the company.

On the business end, investors also will be looking at a key measure of bank profitability, return on equity. Last quarter, Wells Fargo(WFC) boasted an ROE of 11.7%, down from 11.75% from the previous quarter but higher than its peers. Comparatively, J.P. Morgan reported an ROE of 10% in the second quarter. Wells Fargo(WFC), the country's largest mortgage lender, also provided $63 billion in home loans from the end of March to the end of June and has increased home-loan growth over the past several quarters.

But all those solid results could be dented in the coming periods as its relationships are put to the test.

Buffett, who heads up Berkshire Hathaway Inc. (BRKA), has been eerily quiet as the scandal has played out. It has cost him more than $1.5 billion on paper. "This episode is really unbelievable to someone who has followed Wells [Fargo(WFC)] for three decades and has seen its exemplary long-term performance," Mayo said.

J.P. Morgan Chase and Citigroup also are scheduled to report quarterly results Friday.

Check out:Here's what Wells Fargo(WFC) may disclose in its coming earnings and SEC filings (http://www.marketwatch.com/ story/heres-what-wells-fargo-may-disclose-in-its-coming-earnings-and-sec-filings-2016-10-12)

-Mark DeCambre; 415-439-6400; [e-mail]


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