Turtles may move slowly, but they have long lifespans and can get very large. Image source: iStock/Thinkstock.
Wells Fargo (WFC 2.73%) reports third-quarter earnings on October 14. Here are five things investors in the nation's fourth-biggest bank by assets will want to keep their eyes on.
1. Earnings per share
Profits are the name of the game when it comes to banking or, for that matter, any business. As such, the first thing Wells Fargo shareholders will want to watch for when the California-based bank reports third-quarter results are its revenue and earnings per share. Despite the continued drag on revenue from low interest rates, analysts expect both figures to increase.
|
Metric |
3Q14 |
2Q15 |
3Q15 Analyst Estimates |
|---|---|---|---|
|
Revenue |
$21.21 billion |
$21.32 billion |
$21.77 billion |
|
Diluted earnings per share |
$1.02 per share |
$1.03 per share |
$1.05 per share |
Data source: Yahoo! Finance.
2. Net interest income
Because a large share of most banks' loan portfolios are indexed to the prime rate, which tracks the federal funds rate set by the Federal Reserve, the central bank's decision to leave rates steady at its September monetary policy committee meeting means that banks will continue to earn meager profits from their loan portfolios. But while the yield on Wells Fargo's asset portfolio may continue to inch downward in the third quarter, loan and deposit growth should nevertheless boost the amount of net interest income the bank generates.
|
Metric |
3Q14 |
2Q15 |
|---|---|---|
|
Net interest margin* |
3.06% |
2.97% |
|
Net interest income |
$10.94 billion |
$11.27 billion |
*The net interest margin is calculated by dividing a bank's net interest income (i.e., interest income minus interest expense) by its average earning assets. In this way, the net interest margin communicates the yield on a bank's portfolio of loans, fixed-income securities, and other interest-earning assets. Data source: Wells Fargo's 2Q15 earnings release.
3. Loan and deposit growth
Wells Fargo's principal business is accepting deposits and making loans. As such, investors will want to see both of these figures creep higher in the three months ended September 30.
|
Metric |
3Q14 |
2Q15 |
|---|---|---|
|
Average core deposits* |
$1.01 trillion |
$1.08 trillion |
|
Average loans |
$833.2 billion |
$870.5 billion |
*Core deposits consist of noninterest-bearing deposits, interest-bearing checking, savings certificates, certain market rate and other savings, and certain foreign deposits. Data source: Wells Fargo's 2Q15 earnings release.
4. Expenses/efficiency
Wells Fargo is among the most efficient banks in the country. Its 58.5% efficiency ratio, calculated by dividing a bank's noninterest expense by its net revenue, means that it spends less than 60% of its top line to operate the business. For the first six months of 2015, by contrast, Bank of America's efficiency ratio was 67.4%. Suffice it to say that investors will want to see Wells Fargo hold the line on expenses.
|
Metric |
3Q14 |
2Q15 |
|---|---|---|
|
Noninterest expense |
$12.25 billion |
$12.47 billion |
|
Efficiency ratio |
57.7% |
58.5% |
Data source: Wells Fargo's 2Q15 earnings release.
5. Profitability
Return on equity is the ultimate metric when it comes to assessing the quality of a bank stock. Calculated by dividing a bank's net income by its shareholders' equity, the general rule is that you want to see a bank earn at least 10% on its equity. And, of course, ideally you want to see more. The good news for Wells Fargo shareholders is that it's long been one of the most profitable banks in the country by this measure. Shareholders will want to see this trend continue unabated.
|
Metric |
3Q14 |
2Q15 |
|---|---|---|
|
Return on assets |
1.40% |
1.33% |
|
Return on equity |
13.10% |
12.71% |
Data source: Wells Fargo's 2Q15 earnings release.
In sum, while Wells Fargo shareholders should keep tabs on their investment, there's little reason to believe that the $1.7 trillion bank will depart from its trajectory of slow and steady growth anytime soon.
