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Wells Fargo (WFC) Q2 Earnings: Disappointment in Store?

Wells Fargo & Company WFC is scheduled to report second-quarter 2017 results on Jul 14.

The San Francisco-based banking giant has been much in the news following the sales scam that came into light in Sep 2016. The bank has been subjected to severe political and public outrage, and faced several lawsuits and investigations as well.

Hence, Wells Fargo undertook a number of steps to restore its reputation, post scandal. Recently, the bank received preliminary approval from the U.S. District Court for the Northern District of California for the settlement of a class-action lawsuit for $142 million. The class-action suit is related to the bank’s practices of opening more than 2 million credit and deposit accounts for its customers without their permission since 2009. Wells Fargo expects this payment to settle claims in 10 other pending suits.

Amid such adversities, shares of Wells Fargo gained just 14.0% over the past one year, significantly lagging 43.0% growth recorded by the Zacks categorized Banks – Major Regional  industry.

Will the upcoming earnings release exert more pressure on the stock? Notably, Wells Fargo has delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 1.52%. However, our proven model shows that Wells Fargo is likely to miss the Zacks Consensus Estimate in the second quarter.

A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing the odds of an earnings beat.

Unfortunately, this is not the case here, as elaborated below.

Zacks ESP:The Earnings ESP for Wells Fargo is -0.98%. This is because the Most Accurate estimate of $1.01 comes below the Zacks Consensus Estimate of $1.02. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Wells Fargo’s Zacks Rank #4 (Sell) further lowers the predictive power of ESP. It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors to Influence Q2 Results

Expenses May Trend Higher: Wells Fargo may record escalated costs given its franchise investments in areas, including mobile banking technology, digital lending and brokerage offerings. Notably, seasonally higher personal expenses recorded in the first quarter are expected to decline in the to-be-reported quarter, but salary expense is expected to increase, reflecting annual salary increases which became effective late in the first quarter.

Wells Fargo anticipates the efficiency ratio to be in the new range of 60–61%, but the company is targeting around $4 billion of cost savings by year-end 2019.

Mortgage Business to Surge:  Wells Fargo – one of the largest mortgage lenders in the nation – might record rise in mortgage banking revenues. Seasonally higher mortgage banking is expected on stronger origination volumes. However, the bank expects decline in auto portfolio to reflect lower origination volumes. Management tightened credit underwriting standards in response to early signs of rising delinquencies in the industry and declining used car values. As a result, the quality of originations has improved and the company expects the size of the auto portfolio to decline persistently in 2017. Given current industry pricing trends, management anticipates production margin to decline in the second quarter.

Pressure on Net Interest Margin (NIM) Might Ease: Though the prolonged low-rate environment has taken a toll on the bank’s margins over the past several years, the Fed’s recent rate hike for the fourth time, since the financial crisis, and its commitment to raise rates faster (one more time) this year, based on a convincing pace of economic growth, will likely help banks get rid of shrinking margins further. However, lower treasury yields during the quarter might curb margin improvement.

Loan Growth: Per the Federal Reserve’s latest data, loans grew on a sequential basis during the second quarter. Both commercial real estate loans and commercial and industrial loans (C&I) are anticipated to increase, while consumer loans might fall. Therefore, interest income for banks is projected to improve marginally. However, the auto portfolio runoff is likely to continue in the near term on tightening of underwriting standards by Wells Fargo. Notably, the bank is cutting back its auto lending business amid stressful markets and adherence of more centralized risk controls.

Stocks That Warrant a Look

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

Comerica Incorporated CMA has an Earnings ESP of +4.67% and a Zacks Rank #2 (Buy). It is scheduled to report second-quarter 2017 results on Jul 18. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Fifth Third Bancorp FITB is +2.38% and it carries a Zacks Rank #3. The company is scheduled to release second-quarter results on Jul 21.

Huntington Bancshares Incorporated HBAN has an Earnings ESP of +8.70% and a Zacks Rank #3. It is slated to report second-quarter results on Jul 21.

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