Friday, July 11, 2014

The reassuring earnings report from Wells Fargo (WFC) and easing of Portugal-related fears should result in a normal trading session today with a positive open. The spotlight is firmly now on the Q2 earnings season, which goes into high gear next week with more than 60 S&P 500 members coming out with results.

Wells Fargo kicked-off the Q2 earnings season for the banking sector, with in-line earnings on modestly higher revenues. The stock has outperformed its peers in the recent past, with investors rewarding the bank for its disciplined local banking focus and lack of capital markets exposure that has been hobbling its peers. Expectations for the Finance sector in general and the large banks in particular are fairly modest, with total earnings for the sector expected to be down for the second quarter in a row from the same period last year.

With persistently low interest rates keeping net interest margins under pressure and the mortgage business well past its prime, these operators are finding it difficult to deal with weakness in both the corporate as well as capital markets businesses. The resumption in M&A activity is a net positive, but isn’t enough by itself to move the needle for these huge entities.

Wells Fargo isn’t entirely immune from these headwinds. After all, it is the largest player in mortgage market, which has suffered lately due to the drop-off in refinancing activities. Wells’ mortgage non-interest income was down 39% from the same period last year. But the bank was able to offset the mortgage weakness with cost discipline, improved credit quality and momentum in its overall loan portfolio.

Wells reported a gain of 7% in core loans, with growth in both commercial and consumer loans. The loan growth performance is a net positive and offers favorable read-through for J.P. Morgan (JPM), Citi (C) and Bank of America (BAC) that report next week.

That said, the very modest earnings growth numbers, up 4% on a year-over-year basis, from the best bank in the space should tell us something about the overall growth challenge here. Comparisons will be tough for Wells’ peers reporting next week.

Sheraz Mian
Director of Research


 
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Tickers in this Article: WFC, JPM, C, BAC

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