Wells Fargo: Sum of All Earnings Fear Loser

NEW YORK ( TheStreet) -- Wells Fargo ( WFC) was Friday's financial loser, with shares down 1% to close at $35.10.

The broad indexes ended mixed, but the KBW Bank Index ( I:BKX) was down 1% to close at 53.18, after Wells Fargo kicked off fourth-quarter earnings season by reporting a record profit of $5.1 billion, or 91 cents a share, but also reported that its net interest margin continued to decline and declines in mortgage banking revenue.

Wells Fargo's earnings grew from $4.9 billion, 88 cents in the third quarter, and $4.1 billion, or 73 cents a share, during the fourth quarter of 2011.

Wells Fargo's fourth-quarter profit beat the consensus estimate of 89 cents among analysts polled by Thomson Reuters, and its fourth-quarter revenue of $21.9 billion also beat the consensus estimate of $21.3 billion. The company was certainly not the weakest name on Friday among the 24 components of the KBW Bank Index, but what may have disappointed investors and set a negative tone for earnings season was that the company's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.56% from 3.66% in the third quarter and 3.89% a year earlier, reflecting "deposit growth of $30 billion in the quarter (12 percent annualized)," which "caused cash and short term investments to increase."

The company said that the inflow of deposits was "neutral" to net interest income, which was $10.6 billion in the third quarter, declining from $10.7 billion the previous quarter, and $10.9 billion a year earlier.

Wells Fargo reported third-quarter mortgage banking revenue increased to $3.1 billion from $2.8 billion in the third quarter and $2.4 billion in the fourth quarter of 2011, however, a coming slowdown in mortgage lending volume was signaled, as "unclosed pipeline of new residential mortgage loans at December 31, 2011, was $72 billion compared with $84 billion at September 30, 2011." When discussing the pipeline during the company's earnings call with analysts, Wells Fargo CFO Tim Sloan said "we would expect to benefit from seasonally stronger applications in the first quarter.

The company repurchased 27 million shares during the fourth quarter and said that a forward repurchase of another 6 million shares would settle during the first quarter.

Jefferies analyst Ken Usdin said in a report that although the market was focusing on the narrowing net interest margin, "we see flat net interest income as a decent result given huge deposit growth." However, the analyst added that "sustainability of mortgage banking will come into question given a 16% decline in its unclosed pipeline."

Usdin rates Wells Fargo a "Buy," with a $39 price target, and estimates the company will earn $3.55 a share during 2013, with EPS increasing to $3.65 in 2014.

Wells Fargo's fourth-quarter return on equity not return on average tangible common equity, which is often used for comparison was 11.97%, which was up from 10.95% a year earlier, and measured up quite well in the current environment for the largest U.S. banks.

During the preceding four quarters through the third quarter of 2012, Wells Fargo's operating ROE was 12.03%, according to Thomson Reuters Bank Insight, exceeding the ROE of the rest of the "big four" U.S. banking club and underlining the relatively low multiple for the company's shares to earnings estimates:
  • For Bank of America (BAC), the return on equity for the 12-month period ended Sept. 30 was 2.32%. The company's shares closed at $11.63 Friday, trading for 12 times the consensus 2013 earnings estimate of 97 cents, which is the highest forward price-to-earnings ratio among the big four. The consensus 2014 EPS estimate is $1.26. The company will announced its fourth-quarter results on Jan. 17, and on Monday said that earnings would be only ""modestly positive," as a result of its mortgage putback settlement with Fannie Mae (FNMA) and because of its participation in an $8.5 billion mortgage foreclosure settlement with federal regulators.
  • For Citigroup (C), the operating ROE for 12 months through Sept. 30 was 3.98%. Citi's shares closed at $42.34 Friday, trading for 9.1 times the consensus 2013 EPS estimate of $4.67. The consensus 2014 EPS estimate is $5.16.
  • JPMorgan's (JPM) operating ROE for the 12-month period ended Sept. 30 was 10.42%. The company's shares closed at $46.14 Friday, trading for 8.7 times the consensus 2013 EPS estimate of $5.31, which is the lowest forward P/E among the big four. The consensus 2014 EPS estimate is 2014. JPMorgan will announce its fourth-quarter results on Jan. 16.

Wells Fargo's shares trade for 9.7 times the consensus 2013 EPS estimate of $3.61. The consensus 2014 EPS estimate is $3.87.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.