Despite a rash of scandals that have hobbled its stock, Wells Fargo & Co. (WFC) surprisingly has been beating consensus earnings estimates so far this year. Its EPS numbers exceeded expectations by more than 10% in 1Q and by 13% in 2Q, per Yahoo Finance.

By contrast, the performance of Wells Fargo's stock reflects deep skepticism on the part of investors as it prepares to report 3Q profits in mid-October. Its stock has risen by only 9.5% for the year-to-date through Monday while the KBW Bank Index has risen by 17.2%, while the S&P 500 Index (SPX) has posted a 19.3% gain. That lagging performance might stretch the patience even of longterm investors such as Warren Buffett's Berkshire Hathaway Inc. (BRK.A), a major owner of the bank's shares.

What Investors Are Watching For

Like other banks, Wells Fargo faces powerful macro headwinds, including lower interest rates and a slowing economy. The Federal Reserve's decision to embark on a program of cutting interest rates has created a negative macro environment for Wells Fargo's profit margins, particularly its net interest margins, which tend to fall when interest rates are dropping. That squeezed Wells Fargo's profits in the second quarter. In order to attract sufficient funds from depositors, Well Fargo had to increase the average yield that it paid on interest-paying deposits from 0.89% in 1Q 2019 to 0.96% in 2Q 2019, The Wall Street Journal reports. As a result, the bank's net interest margin fell from 2.91% to 2.82%, and its net interest income dropped by $216 million. Investors will be keen to see if this trend continues when it reports.

Analysts' Estimates

By some accounts, Wells Fargo's various crises have led the bank to deteriorate from an aggressive, rapidly growing lender into a slow-growth bank that has used cost cutting to boost profits.

Despite that, investors may find that the bank's cost-focused strategy is reaping diminishing returns. Analysts are anticipating an unimpressive earnings report from Wells Fargo. The current consensus estimate projects EPS of $1.16 in 3Q 2019, up by 3 cents or 2.7% on a year-over-year (YOY) basis, but down from $1.20 in 1Q 2019 and $1.30 in 2Q 2019. With respect to revenue, the consensus forecasts $20.88 billion in 3Q 2019, down by 4.8% YOY, and down by 1.0% from 2Q 2019.

Weak Loans Outstanding

Wells Fargo's loan growth has ground to a halt. Average loans outstanding, a key driver of profits, have stagnated, with the 2Q 2019 figure of $949.9 billion up by a mere 0.4% YOY, but down by 0.3% from the prior quarter, per the company's second quarter earnings supplement. On the bright side, nonperforming assets were just $6.3 billion in 2Q 2019, down by 17.1% YOY and by 13.7% from the prior quarter. If 3Q 2019 results show increased loan quality, that may offset some concerns about diminished loan growth.

Wells Fargo has yet to put its 2016 sales practices scandal completely behind it, which has tarnished its reputation and led to enhanced regulatory oversight. To meet sales targets, Wells Fargo staff had opened accounts for customers without their knowledge or consent on a massive scale. The scandal has made prospective customers wary to this day, per another Journal report.

Indeed, the bank has indicated that its overall program of cost reduction is being hampered by the need to spend more on risk management and compliance efforts in response to increased regulatory scrutiny.

Looking Ahead

It will take a new CEO to give the bank direction--if they can hire one. Management is in turmoil, with the CEO slot still not filled on a permanent basis since the previous incumbent retired in March. Worse yet, sources indicate to the Journal that several top candidates have turned down offers to lead the troubled bank. "That is like a ship without engines in high seas," as Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, wrote to clients, per the Journal.