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What's in Store for Wells Fargo (WFC) This Earnings Season?

Wells Fargo & Company WFC is scheduled to report first-quarter 2016 results before the opening bell on Thursday, Apr 14. Too many questions linger on the minds of investors this time around, given the tough industry backdrop and litigation hassles that the bank endured during the quarter.

In the last quarter, driven by organic growth, aided by higher revenues along with strong loans and deposit balances, Wells Fargo reported a positive earnings surprise of about 1%. The company also exceeded the year-ago earnings of the year-ago quarter. However, it experienced a rise in provisions on a year-over-year basis.

Recently, Wells Fargo admitted to malpractices as the company formally reached the $1.2 billion settlement with the U.S. government regarding the bank’s Federal Housing Administration (‘FHA’) lending program. The settlement was disclosed in February this year.

Accounting for legal costs, Wells Fargo reduced its net income for 2015 by $134 million, or 3 cents per share. Though the settlement affected Wells Fargo’s earnings for 2015, it relieved the company of legacy issues. We are encouraged by the efforts made by this Wall Street banking giant in gradually resolving its legal overhangs.

Will Wells Fargo be able to beat earnings after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Influence Q1 Results    

Global concerns, a persistently low interest rate environment and downward pressure on oil prices have been the headwinds for banking stocks. Energy lending, which once happened to aid the U.S. oil boom, now seems to be a burden for banks in the form of continuous regulatory pressure to limit exposure to the sector.

Despite the rise in loan demand, revenue growth will remain restrained (similar to previous quarters). This is because of a continuing low rate environment on net interest income, though a small uptick might be recorded due to a slight rise in interest rates in December.

Mortgage business on the other hand seems to be rising, as the low rate environment might have pushed people to refinance home loans. Moderate growth in fresh mortgage originations is also expected.

Efforts to strengthen the top line by focusing more on non-interest income have not been fully successful either. Moreover, concerns over macroeconomic issues pulled investors out of the market. Therefore, trading activity is likely to remain subdued, particularly given the cautious steps taken by investors amid uncertainties surrounding the global economy.   

Banks are continuously looking for restructuring activities to control costs and improving the bottom-line performance. Strengthening its efforts to increase market share in commercial lending markets, Wells Fargo completed the acquisition of General Electric Company’s commercial lending and leasing businesses in North America during the quarter.

Industry-wide weakness in the key operating segments and regulatory matters are expected to hamper results. Though Wells Fargo has implemented company-wide expense management initiatives, it is facing challenges to control costs. Over the past few quarters, the company has been experiencing an increase in non-interest expenses. The absence of significant improvements in cost management is expected to continue to hurt the company’s bottom line.

Notably, the efficiency ratio for 2016 is anticipated to be on the higher end of the company’s targeted range of 55–59%.

Based on current market conditions, management expects the level of its application pipeline to go down in 2016. Given continued weakness in the energy sector, management expects to face higher losses related to oil and gas in 2016.  Further, deterioration in the energy sector is likely to result in higher criticized assets, nonperforming loans, allowance levels and eventually lead to higher credit losses.

Additionally, legal costs are now an integral part of Wells Fargo’s financials. With increasing regulatory scrutiny on the business model, Wells Fargo is not expected to rid itself of such expenses, at least in the near term, though settlement efforts should take the burden off its shoulders.

Most importantly, this banking giant failed to impress analysts with its level of activities during the quarter. The weakness surrounding the industry and the company's financials, which are highly susceptible to such negatives, forced many analysts to significantly lower their earnings estimates. The Zacks Consensus Estimate has moved down around 1.01% to 98 cents per share over the last seven days.

Earnings Whispers

Our proven model shows that Wells Fargo is likely to miss the Zacks Consensus Estimate in the first quarter.  This is because a stock needs to have both a positive http://www.zacks.com/earnings/earnings-surprise-predictions/">Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here, as elaborated below.

Zacks ESP:  The Earnings ESP for Wells Fargo is -1.02%. This is because the Most Accurate estimate of 97 cents is below the Zacks Consensus Estimate of 98 cents.

Zacks Rank: Wells Fargo’s Zacks Rank #4 (Sell) further lowers the predictive power of ESP.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as they have the right combination of elements to post an earnings beat this quarter, according to our model.

MB Financial Inc. MBFI has an earnings ESP of +1.96% and carries a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 18.

The earnings ESP for PrivateBancorp, Inc. PVTB is +1.75% and carries a Zacks Rank #3. The company is expected to release first-quarter results on Apr 21.

Simmons First National Corporation SFNC has an earnings ESP of +1.30% and carries a Zacks Rank #3. It is scheduled to report first-quarter results on Apr 21.

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WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
PRIVATEBANCORP (PVTB): Free Stock Analysis Report
 
MB FINANCL INC (MBFI): Free Stock Analysis Report
 
SIMMONS FIRST A (SFNC): Free Stock Analysis Report
 
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