Wells Fargo May Have Had a Boring Quarter, But It's Still Going Strong

Source: Company

Wells Fargo (NYSE: WFC  ) kicked off the bank earnings season last Friday with many more big banks from Bank of America to Goldman Sachs reporting this week.

If Wells Fargo's second quarter results were indicative of what comes this week, investors shouldn't expect a blowout quarter.

Though Wells Fargo's second quarter results were quite boring, they still highlight that the bank is healthily bettering itself: Loans are up strongly, asset quality improved further and the bank delivered a slight increase in its net income per diluted share.

All those metrics underscore stable business growth.

With Wells Fargo reporting a 3% y-o-y profit increase on a per share basis, investors probably make a safe bet by assuming that other banks will also report minor, yet steady gains in net income.

Earnings
Wells Fargo's earnings have been marking a steady upward trend.

Source: Wells Fargo Second Quarter Earnings Presentation

Second quarter earnings stood at $5.7 billion which was about 4% higher than earnings in the second quarter of last year. On a diluted per share basis, earnings rose 3% to $1.01, but declined slightly on a sequential basis.

However, first quarter results included a non-recurring tax benefit of $423 million which biased Wells Fargo's net income per diluted share upwards by $0.08.

Wells Fargo's underlying earnings trend is very much intact. With increases in both interest and noninterest income and loan and deposit growth, Wells Fargo continues to build on its strength as an integrated banking franchise.

With solid core loan growth, Wells Fargo stays true to its roots: Providing capital to businesses and consumers which stimulates the local economy and benefits all stakeholders: A win-win situation.

Loan growth
Loan growth is one of the first things I look at when I am presented with bank earnings.

Source: Wells Fargo Second Quarter Earnings Presentation

Loan growth indicates how strong a bank performs at its core. Business and consumer lending is vital for the bank's growth, the creation of credit and equally important for the prosperity of local communities. In other words: Lending, if it is done prudently and underpinned by robust due diligence, can be a true long-term growth driver for a bank.

And Wells Fargo certainly performs well. It has gradually increased its core loans over the last four consecutive quarters by a total of $51.3 billion or 7% over Q2 2013 core loan levels of $721.3 billion.

At the same time, Wells Fargo has reduced non-strategic loans by $22.3 billion to $65.3 billion or 25% over last year's second quarter.

In the second quarter of 2014, commercial and industrial loans increased 10% year-over-year and automobile loans 11% year-over-year providing substantial boosts to Wells Fargo's loan business performance.

Asset quality
Analysts and investors pretty much expected ongoing improvements in Wells Fargo's asset quality.

Source: Wells Fargo Second Quarter Earnings Presentation

Wells Fargo convinces investors, that it has a solid grip on its asset quality by displaying a consistently low net-charge off ratio and declining charge-offs over the last year.

In the second quarter of 2014, Wells Fargo reported $0.7 billion in net charge-offs which is down significantly from the $1.2 billion hitting the bank in the second quarter of 2013.

Its current net charge-off ratio stands at just 0.35%. Since Wells Fargo's charge-off ratio is already so low, I expect little improvements in that metric going forward.

The Foolish Bottom Line
Wells Fargo's second quarter results were pretty unspectacular and didn't contain any overly good and bad surprises. For the time being, Wells Fargo is concentrating on its core business and driving value via share repurchases.

With a growing loan portfolio and decreasing non-core loans, Wells Fargo does all the right things to set the bank up for future growth.

Though investors might have to put up with a couple of boring quarters in 2014, Wells Fargo certainly is a well-run bank that should be able to increase its equity valuation over time.

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  • Report this Comment On July 14, 2014, at 6:12 PM, Blackhawk wrote:

    A fair and quite unbiased analysis of Wells Fargo.

    The bank looks solid. Has stuck to the core philosophy of the CEO (very admirable traits and stubbornness) who got them through the last 7 to 8 years.

    The transition factor for the new CEO is/will be seamless........as both persons are very admirable/capable guys.

    I have been very impressed with this company's strategic structure and shall continue to invest (I just added more stock to my portfolio yesterday).

    To management I say 'maintain the good work'.

    To fellow investors I say:

    FOOL ON

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