Wells Fargo (NYSE:WFC) reported its second-quarter results, and for the most part, investors should be pleased with the bank's performance. Not only did Wells Fargo beat expectations on both the top and bottom lines, but management has also done a good job of controlling expenses, and the bank's profitability metrics are starting to look like what we'd expect from Wells Fargo once again.
The falling-rate environment seems to be weighing on the bank's stock, so it's important to realize that the bank actually had a better quarter than it may seem at first glance. With that in mind, here's a look at the headline numbers and the other key takeaways from Wells Fargo's second quarter that investors should know.
Strong earnings and revenue
It's tough to get a good idea of how any business is doing just by looking at the top- and bottom-line numbers. Having said that, these numbers can be an important piece of the big picture.
Wells Fargo topped expectations on both. Revenue of $21.58 billion came in $650 million higher than forecasts had called for, and earnings of $1.30 per share handily surpassed the $1.15-per-share consensus and are a big jump from $0.98 in the same quarter last year. In short, Wells Fargo's second quarter looks good on the surface.
Looking deeper into Wells Fargo's business
As I mentioned, it's difficult to get a good sense of a business' performance by just looking at the headline numbers. Wells Fargo's second quarter is actually a great example of why -- judging from the earnings and revenue numbers, you might expect that the bank's stock is rocketing higher, but in fact shares are down a bit in reaction to this news.
With that in mind, here's a rundown of some of the important details behind the headline numbers to give you a better picture of how the bank is doing:
- Wells Fargo's profitability metrics are as strong as they've been in its post-scandal era. The return on equity (ROE) of 13.26% and the return on assets (ROA) of 1.31% the bank produced in the second quarter are significantly higher than the 12.71% and 1.26%, respectively, that it reported in the first quarter of this year.
- The bank's loan portfolio grew slightly by 0.4%, and deposits fell by 0.2% from a year ago. This isn't surprising given the Federal Reserve's growth restriction still in effect on Wells Fargo, which prevents it from growing its total assets.
- Charge-offs rose from a year ago. Net charge-offs of $653 million are $51 more than the bank had in the second quarter of 2018, and the annualized net charge-off rate of 0.28%, while still low, is 2 basis points higher than a year ago.
- Wells Fargo's 62.3% efficiency ratio, while an improvement over the first quarter and lower than analysts were expecting, is likely to be the highest (worst) among the large U.S. banks. However, this does indicate that the bank is doing a better job of controlling expenses than it has been in recent quarters.
- Wells Fargo's net interest margin fell by 9 basis points to 2.82%, thanks to falling consumer interest rates and higher deposit costs for the bank. This is likely one of the main reasons for the market's negative reaction to the report and has been a disappointing trend in banking. Fellow big bank JPMorgan Chase (NYSE:JPM) trimmed its full-year net interest income forecast in its second-quarter earnings report, sending shares lower, and Wells Fargo shareholders are likely reacting negatively for a similar reason.
The key investor takeaway
Wells Fargo is doing a good job of controlling expenses and generating strong profits, despite its scandal-plagued recent history and the fact that it isn't allowed to grow yet. Two major issues holding the bank's share price down are the lingering Federal Reserve penalty and the ongoing search for a permanent CEO, so any resolution to either of these two issues could be a positive catalyst going forward.
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