Wells Fargo managed to a slight beat when it came revenue predictions when it announced earnings earlier today (Oct. 15) — but on the whole, there were more misses than hits by the numbers as the bank continues to recover for troubles that started to emerge with the account creation scandal of 2016.
Investors, however, didn’t seem phased by all the red arrows pointing down, as its stock price has been steadily ticking up all afternoon since the earnings results hit the wires and closed slightly up at $50.11. It seems many investors are thinking what Edwards Jones Analysts Kyle Sanders said in how they are looking at today’s results in the context of what they think is coming next for Wells Fargo.
“Everybody’s waiting for Charlie to come in.”
“Charlie” refers to Charlie Scharf, the former Visa CEO and longtime financial services industry leader who is slated to take over the helm of the long-struggling bank on Monday (Oct. 21). He will be the firm’s third CEO in three years.
“There are clearly challenges,” Scharf noted on a call with analysts and media shortly after his unanimous appointment by Wells’ board was announced, “putting them behind us will my focus.”
And judging by the latest earnings reports, Scharf will need to bring much focus to the field, however, enthused by is forthcoming presence investors are.
Earnings were a miss this time around — coming in at an adjusted $1.07 instead of the consensus pre-earnings estimate of $1.15. Net income clocked in at $4.6 billion, a 23 percent drop from $6 billion a year ago. The fall that got the most attention from market watchers was the lower than expected result from net interest income (NII) NII, the difference between what the bank charges borrowers and pays to customers with deposits and it declined by a full 8 percent to $11.6 billion. Analysts were expecting a drop — but only 7.1 percent. NII is Wells' most significant revenue source — and the bank had already lowered its forecasts for 2019 last month, saying that all in it will likely fall by 6 percent in 2019.
On the upside, revenue comes in slightly ahead of pre-earnings forecasts and roughly on par with 2018 at $22 billion. Analysts had forecast $21.2 billion.
Wells Fargo’s loan balances increased to $954.9 billion in total, up $5 billion from Q2 2019. Commercial loans were mostly flat between Q2 and Q3, with consumer loans accounting for most of that $5 billion increase. Originations increased 9 percent to $6.9 billion Looking more closely at loans by segment, new mortgages generated $608 million, but Wells took a slight loss on servicing rights as homeowners refinanced or paid off loans early in the wake of the Federal Reserve’s decision to decrease the federal funds rate. Credit card loans increased $809 million since Q2, a factor mainly attributed to seasonal upswings that are common to early fall. Auto loans also show strong growth with balances up $1.1 billion from the second quarter.
More than originations and an increase in card, interim CEO Alan Parker noted, Wells is also starting to see a return to greater use of their cards by consumers. Credit card purchase volume grew 5 percent year-on-year while debit purchased increased by 6 percent. That result marks the bank's eighth consecutive quarter of achieving at least 5 percent year-over-year growth in both debit and credit card purchase volume.
The bank is also continuing to shift its use of patterns among its consumers. Teller and ATM-based transactions were down 6 percent year over year — a direct result of continuing customer migration to “digital channels.” Of those digital channels, Well Fargo reported 30.2 million digitally active customers as of Q3, a 4 percent increase from a year ago. Within that subset, customers accessing the bank via mobile channels increased by 7 percent.
But notably — while Wells’ representatives were optimistic and positive about the results this time though — there was a specific “we’ll see when Charlie comes in” vibe particularly in response to many analysts' questions about the bank's ongoing restructuring, and possible pain points on the path.
“I think when Charlie arrives, we'll conduct a complete strategic review of where all the businesses stand and where we — what our opportunities are, et cetera,” Parker noted in response to a BoA analyst’s question.
Moreover, he noted, the investments Wells is making today in both terms of time and treasure will have costs. But those costs will be worth the benefits down the road, he said, because today’s investments are what clear the path for legitimate innovation in the future.
“So the money we spend on technology, in data, for example, has huge customer impact down the road. So there's not an either-or necessarily, there's a lot of mutual benefits from running a more controlled environment. But that will be work that we all do together with Charlie after he arrives and then present conclusions at the right time.”
Since the earnings data was released, Wells Fargo has been on track to have its share price increased in 2019, impressive since so its report had many more misses than hits. The market seems to agree with the analysts for now — what happens next when Charlie Scharf takes over the top spot is much more important than what came before, even as recently as last quarter.
Charlie Scharf steps into a big job next week — with what looks like some very big expectations laid on his shoulders.