Wells Fargo & Company (WFC, Financial) recently revealed its first-quarter earnings for fiscal 2015 with earnings that beat consensus estimates. Although the company’s net income of $5.5 billion for the quarter was down 3% year over year, Wells Fargo’s EPS of $1.04 a share comfortably surpassed the consensus estimate of $0.98 a share. The company also saw its revenues growing 3% year over year to $21.3 billion, outpacing the consensus estimate of $21.1 billion. Despite the upbeat results, Wells Fargo shares swung between a high of $55.18 in premarket trading and a low of $53.57 during the day’s trading before closing at $54.28.
Revenues grow, but margins take a dip
Wells Fargo’s quarterly revenue growth to $21.3 billion came as a result of better performance at all of the bank’s operating segments with revenues climbing by 8%, 6% and 2% respectively at its Wealth, Brokerage & Retirement, Wholesale Banking and Community Banking segments. The company saw net interest income of $11.0 billion for the quarter, up 3% compared to the prior-year quarter, on the back of lower deposits expenses and increased income from investment securities and trading assets. However, net margin on interest, which measures the difference between what a bank makes on lending and what it pays on deposits, slipped by 25 basis points year over year to 2.95%.
At the same time, Wells Fargo saw its noninterest income climbing 3% year over year to $10.3 billion owing to factors such as higher net gains on debt securities, higher card and investment fees and growth in revenues from mortgage banking. However, which competes with other large money center banks in the U.S. such as JP Morgan Chase (JPM, Financial), Bank of America Corporation (BAC, Financial) and Citigroup Inc. (C, Financial), saw a decline in net gains from equity investments and trading activities.
While Wells Fargo reported a 4% year-over-year rise in total loans to $861.2 billion on the back of growth in both consumer and commercial portfolios, the company’s total deposits for the quarter grew 9% year over year to $1.2 trillion. The U.S. banking giant also logged an efficiency ratio of 58.8% for the first quarter, up from the year-ago quarter’s 57.9%. However, with a higher ratio indicating a drop in profitability, the bank expects to maintain the targeted ratio for the full fiscal 2015 in the 55%-59% range. Further, with the bank contemplating inherent credit losses related to its exposure to oil and gas, Wells Fargo also announced a future provision of around $608 million for credit losses. The figure is almost double the $325 million provision from the prior-year quarter. At the same time, while the company reported improved credit quality metrics for the quarter, Wells Fargo also maintained a robust capital position, repurchasing 48.4 million shares and entering into a forward buybacks transaction for another 14.0 million shares.
Final thoughts
Although Wells Fargo reported a slight drop in year-over-year earnings for Q1 2015, the company’s quarterly EPS managed to comfortably beat the consensus estimate. Further, revenues also grew by a modest level compared to the year-ago figures on the back of growth across the entire bank’s operating segments. However, the fall in net interest margin from 3.20% in the year-ago quarter and 3.04% in the last quarter to the current 2.95% is a cause for worry. Although experts foresee revenue headwinds to persist through the fiscal owing to the protracted economic recovery and reduced interest rate environment, the bank’s earnings are expected to grow at an average annual rate of 9.77% over the next five years with a likely peak in FY2018. Consequently, the Wells Fargo stock currently carries a "hold" guidance for the short to mid-term, but a "buy" guidance for the long-term.
