Wells Fargo Earnings: What Happened

WFC provisions for loan losses were below expectations

Key Takeaways

  • EPS was $0.64 vs. the $0.58 analysts expected.
  • Revenue fell short of analyst expectations.
  • Loan loss provisions were lower than the level analysts estimated.
  • The bank's board of directors approved an increase in share buybacks.

What Happened

Wells Fargo reported its Q4 FY 2020 financial results, posting a rise in EPS that surpassed analyst expectations. Revenue, however, missed expectations and fell for the fifth consecutive quarter on a year-over-year basis. The bank's loan loss reserve declined slightly as loan loss provisions were negative, contrasting with analysts' forecasts of an increase. Wells Fargo's board of directors approved an increase in repurchases of common stock.

(Below is Investopedia's original earnings preview, published January 14, 2021.)

What to Look For

Wells Fargo & Co. (WFC) is among several other big U.S. banks given the green light to resume share buybacks in the first quarter of 2021 by the Federal Reserve. The U.S. central bank lifted its buyback ban for the most profitable lenders, deeming that their capital buffers sufficient to withstand 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 been weathering the economic fallout from the pandemic when the bank reports earnings on January 15, 2021 for Q4 FY 2020. Analysts expect both earnings per share (EPS) and revenue to decline compared to the same three-month period a year ago.

But investors also will be focused closely 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 soured loans. The more cash it sets aside to protect against loan losses means that it has less money available to return to shareholders via buybacks. Analysts forecast the company will sharply increase its loan loss provisions from the year-ago quarter, albeit by not as much as in the first two quarters of the year.

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

One Year Total Return for S&P 500 and Wells
Source: TradingView.

Poor financial results over the past year have weighed on the stock. Wells Fargo reported an EPS decline of 54.7% in Q3 FY 2020. Revenue sank 14.3% compared to the same three-month period a year ago. It marked the fourth consecutive quarter of revenue declines. The bank noted that historically low interest rates lowered its net interest income, the difference between the interest it earns on the loans it makes and the interest it pays out on customer deposits.

In Q2 FY 2020, Wells Fargo posted a loss per share of $0.66, its first loss in at least 15 quarters. Revenue fell 17.4% compared to the year-ago quarter. In Q1, EPS plunged 99.2% and revenue fell 18.0%. The negative impact of the pandemic have hurt financial results, compounding the bank's recent financial costs related to the fake-accounts scandal that came to light in 2016. That scandal has cost the bank billions of dollars and tarnished its reputation.

Analysts expect continued financial deterioration at Wells Fargo in Q4 2020, albeit less severe than in recent quarters. EPS is expected to decline 2.8% while revenue falls 8.9%, which would be the fifth consecutive quarter of declining revenue. For full-year 2020, analysts forecast EPS to sink 91.1% and revenue to fall 14.6%, the largest declines for both in five years.

Wells Fargo Key Metrics
   Estimate for Q4 2020 (FY)  Q4 2019 (FY)  Q4 2018 (FY)
 Earnings Per Share ($)  0.58 0.60 1.21
 Revenue ($B)  18.1 19.9 21.0
 Loan Loss Provisions ($M)  881.9 644.0 521.0

Source: Visible Alpha

As mentioned above, investors also will closely watch Wells Fargo's loan loss provisions, which the bank refers to as provisions for credit losses. This key metric indicates how much cash the bank is adding to its loan loss reserves to cover bad loans. As an income statement expense, loan loss provisions reduce profits. Rising loan loss provisions suggest a bank is anticipating an increase in loan defaults. Banks across the U.S. have substantially increased their loan loss provisions during the pandemic in anticipation of a greater number of households and businesses failing to make debt payments, shrinking profits across the industry.

Wells Fargo is no exception. The bank already had boosted loan loss provisions by 23.6% in Q4 FY 2019, just before the COVID-19 pandemic began to spread across the U.S and hammer the economy. In response, Wells Fargo increased loan loss reserves by a massive 374.0% in Q1 FY 2020, then by 1,795.4% in Q2. While the bank boosted reserves only modestly in Q3, analysts are forecasting another 36.9% increase in Q4 FY 2020. For full-year 2020, the bank's loan loss provisions are expected to increase 464.6%. The anticipation of significant future loan losses by Wells Fargo suggests more economic pain ahead.

Article Sources
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  1. Financial Times. "Federal Reserve frees up US banks to resume share buybacks."

  2. Wells Fargo & Co. "Wells Fargo to Announce Fourth Quarter 2020 Earnings on January 15, 2021."

  3. Visible Alpha. "Financial Data."

  4. Wells Fargo & Co. "Wells Fargo Reports Third Quarter 2020 Net Income of $2.0 Billion, or $0.42 Per Diluted Share," Page 2.

  5. The New York Times. "The Price of Wells Fargo’s Fake Account Scandal Grows by $3 Billion."

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