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What to Expect When Wells Fargo Reports 3Q Earnings on Friday

By John Maxfield - Oct 11, 2017 at 8:22PM

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Will Wells Fargo see its earnings per share drop in the third quarter?

All four of the nation's biggest banks report earnings this week, kicking off a third-quarter earnings season that isn't expected to showcase any major increases or decreases in banks' bottom lines.

Wells Fargo (WFC 1.92%) is slated to report earnings on Friday. Here's what investors can expect from the San Francisco, California-based bank.

A man in a business suit holding a sign that says "What to Expect."

Image source: Getty Images.

Wells Fargo 3Q earnings preview

Wells Fargo is the only one of the four big banks to report earnings this week that analysts believe could see its bottom line drop compared to the year-ago period. The consensus estimate is for the nation's third biggest bank by assets to earn $1.03 per share, which is right in line with the year-ago period. However, analysts at Keefe, Bruyette & Woods (KBW) think its earnings could actually drop to $1.00 per share, which is about 3% lower than the consensus.

KBW lowered its forecast for Wells Fargo's earnings recently, down from $1.01 per share, based on its expectations that the bank's net interest income could come in lower than originally expected as a result of decelerating loan growth.

Slower loan growth is expected to hit all banks, but it's anticipated that Wells Fargo will see the largest impact. Out of the big four banks, it's the only one that analysts at KBW believe will actually see loan growth tip into negative territory.

You can see this in the table below. It's anticipated that JPMorgan Chase (JPM 1.28%) will report that its loan portfolio grew by 5.5%, followed by Citigroup (C 1.91%) and Bank of America (BAC 1.38%) at 3.7% and 1.1%, respectively. Wells Fargo, meanwhile, is expected to see its loan portfolio contract by 0.5%.

Bank

Third-Quarter Loan Growth, Year Over Year

JPMorgan Chase

5.5%

Citigroup

3.7%

Bank of America

1.1%

Wells Fargo

(0.5%)

Source: KBW.

This is an issue for banks because loans are the principal product they sell. Consequently, slower loan growth should translate into slower revenue growth.

The catalyst for the industrywide decline that is now in its fourth consecutive quarter appears to be uncertainty in the business community around tax and regulatory relief, which had been promised by Donald Trump on the presidential campaign trail last year, but which has yet to materialize. The net result is that owners and operators at businesses appear to be waiting to increase their investments, which would spur loan demand, until more clarity is offered around policymaking in the nation's capital.

Additionally, in Wells Fargo's case, the bank continues to deal with fallout from revelations last year that employees at its branches had been opening accounts for customers without customers' authorization for years. They did so to meet the bank's now-eliminated overly aggressive sales goals.

The impact on Wells Fargo's reputation has been significant, though the actual cost of the scandal to date has been relatively small, adding up to a few hundred million dollars in legal fines and settlements.

WFC Chart

WFC data by YCharts.

Either way, the one-time industry darling has seen a throttling of the momentum it felt in the years after the financial crisis, which it emerged from in excellent shape thanks to its decision to steer clear of the most toxic corners of the subprime mortgage market during the housing bubble.

Given this, the most important thing that investors should watch for in Wells Fargo's third-quarter earnings is the bank's commentary around this issue. It's now been over a year since the illicit sales practices were revealed by regulators, which is just about the length of time that one would expect the bank to begin switching from defense to offense.

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Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$39.92 (1.92%) $0.75
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.56 (1.38%) $0.43
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$46.87 (1.91%) $0.88
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$114.05 (1.28%) $1.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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