3 Must-Watch Things in the Wells Fargo Earnings Report

Wells Fargo (NYSE: WFC  ) leads the charge in many people's minds as the top bank in America. So it is seems fitting that it will be the first of the major banks to announce third-quarter earnings. Here are three things to keep an eye on when it reports next week.

1. Wholesale banking business growth
Wells Fargo has three distinct business lines: community banking, wholesale banking, and wealth, brokerage and retirement. The wholesale banking business is Wells' corporate financial arm that provides banking services and solutions to businesses with more than $20 million in sales.

As of last quarter, wholesale banking represented about 35% of Wells' total income. Yet somewhat troublingly, in the second quarter its net income only went up 7% compared to the prior year. On the other hand, Wells' other businesses saw their income skyrocket:

Segment

Year-Over-Year Earnings Growth

Wells Fargo

19%

Community Banking

28%

Wholesale Banking

7%

Wealth, Brokerage and Retirement

27%

However, it must be noted here that the 7% growth isn't totally cause for bad news, as Bank of America's (NYSE: BAC  ) comparable global banking business' net income actually fell by about 2% last quarter. As business conditions improve throughout the U.S., it should be distinctly translated to Wells Fargo's bottom line Wholesale banking results, so check to see if that trend is true.

2. Mortgage trends
There have been countless headlines detailing the dramatic slowdown in the mortgage market as rates rise and the demand for refinancing slows to a steady crawl. In fact, Wells Fargo, Citigroup (NYSE: C  ) , and Bank of America have all announced major layoffs in response to this trend. Wells Fargo is one of the biggest mortgage originators in the U.S. and while it has been one of the biggest benefactors of the huge demand for refinancings, it could face the sharpest hit as these dry up.

Yet Wells has been on top of the trend and is seemingly making the right moves by consolidating certain parts of this business in response to lower demand. Wells Fargo has been proactive in the past to trends like this, and despite falling revenue, it has done a great job of controlling expenses in its community banking business where mortgages are accounted for.

While there will almost undoubtedly be a fall in total mortgage originations, keep an eye on the bank's profit margin, which stood at 25% last quarter.

3. Continued improvement in key metrics
Despite falling net interest margins, last quarter Wells Fargo saw its essential profit metrics of return on assets and return on equity each jump. Its efficiency ratio, which measures the cost it takes to bring in each dollar of revenue, fell both quarter over quarter and year over year.

Yet while all of this is great, it still trails equally esteemed peer U.S. Bancorp (NYSE: USB  ) on all three of those metrics, despite its higher net interest margin as shown in the table below:

 

Wells Fargo

U.S. Bancorp

Net Interest Margin

3.46%

3.43%

Return on Assets

1.55%

1.70%

Return on Equity

14%

16%

Efficiency Ratio

57%

52%

To Wells Fargo's credit, it has been steadily improving those metrics and narrowing the gap between it and U.S. Bancorp. See if that trend continues, because currently Wells Fargo's price to tangible book value multiple would have to grow by 50% to match U.S. Bancorp's, which could mean there is a still a lot of room for growth at this banking powerhouse.

Is Wells Fargo a long-term banking winner?
Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2661962, ~/Articles/ArticleHandler.aspx, 12/21/2014 11:08:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement