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Big Four Bank Earnings: What to Expect

Stocks in this article: BACCJPMWFC

Wells Fargo

Shares of Wells Fargo (WFC) are up 7% year to date, outperforming the KBW Banking Index.
WFC Total Return Price Chart WFC Total Return Price data by YCharts

Wells Fargo has had a strong earnings streak in the last 11 quarters as a strong wave of refinancing has boosted fee income and helped offset some of its net interest margin pressure.

The ability to sustain its strong financial performance has been clouded by concerns that interest rates may rise, ending the refinancing boom that has propped up profits.

Analysts expect the bank to report an earnings per share of 88 cents per share on revenues of $21.58 billion. That is down from the 92 cents it reported in the fourth quarter, but still up sharply from 75 cents a year ago.

"We believe Wells Fargo will face some revenue challenges in both net interest income and fee income. Mortgage banking (14% of total revenues) is expected to decline, margin is expected to be under pressure and loan growth is forecasted to slow," wrote Peter J. Winter, a BMO Capital Markets analyst, when initiating a rating on Wells Fargo with a $40 price target and 'market perform' rating in mid-March.

KBW's Chris Mutascio argues that Wells may still be better off than most other banks. According to the analyst, the bank's mortgage banking income last quarter included several one-time negatives, such as below average servicing income and the retention of mortgages some of which could reverse.

"It appears to us that management rarely lets outsized mortgage banking production to fully hit the bottom line. Rather, it uses those robust periods of time to either: 1) improve the strength of the balance sheet (in the past the company has sold low-yielding securities at losses in order to reinvest at higher yields) and/or 2) make strategic investments in the company (can result in a higher expense base during periods of robust mortgage production activity)," he noted, which has helped the bank consistently generate strong earnings.

For Wells Fargo to outperform Wall Street expectations and continue its earnings growth, the bank will need to post flat profitability in its mortgage banking unit by way of an up to 10% rise in home loan originations, an increase in mortgage servicing profitability and expense reductions, which could offset a sequential decline in refinancing activity of up to 40%, according Guggenheim Securities analyst Marty Mosby.

For more on Wells Fargo's future outlook, please read Wells Fargo's LeBron James Earnings Streak A Hidden Opportunity.

After passing Federal Reserve stress tests in March, Wells Fargo said it would boost its quarterly dividend 20% to 30 cents a share in the second quarter, while also increasing share repurchases in 2013.

Shares of Wells Fargo trade at 1.6 times tangible book value and at nearly 11 times 2013 expected earnings per share.

Wells reports on April 12.

-- Written by Shanthi Bharatwaj in New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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