Wells Fargo & Co (WFC) Earnings Beat: Exposure to Energy Sector Weighs Down Stock

Wells Fargo & Co.’s (NYSE:WFC) released its earnings for the first quarter of fiscal year 2016 (1QFY16) yesterday before the opening bell. The earnings season has kicked off, with big banks setting a mixed tone. While JP Morgan Chase & Co. stock headed north after its earnings release, Wells Fargo didn’t get the push.

Ahead of the earnings influx, analysts revised their estimates with key focus on the energy exposure. Although Wells Fargo’s energy exposure isn’t that significant, investors remained wary of its portfolio.

The bank reported better-than-estimated revenue and earnings for the quarter amid turbulent markets. Net income came in at $5.5 billion, down nearly 5% year-over-year (YoY). Earnings per share (EPS) clocked in at $0.99 in the quarter, down nearly 5 % YoY. Moreover, revenue stood at $22.2 billion, up 4% from the same period last year.

Net interest income and non-interest income also witnessed a hike. Net interest income increased 6% YoY to $11.7 billion in the last quarter, driven mainly by earning asset growth. The quarter-point increase in the federal funds rate in December proved to be profitable for the bank. Loans grew 10% YoY and deposits grew 4% in the quarter. CFO John Shrewsberry outlined expectations about the net interest income growing on full-year basis in 2016 irrespective of a rate hike. Net interest margin pared down 1.7% YoY to 2.9%.

Wells Fargo reported growth of 2% in non-interest income, which came in at $10.5 billion. The increase was driven largely by gains from sales of crop insurance business, lower interest rates, and currency movements on hedging results. Acquisition gains related to deals with General Electric, and trading gains also helped the company in posting positive results.

Non-interest expenses grew 4% in the quarter, primarily driven by operating leases and operating losses. Operating leases increased on the back of leases acquired in GE Capital’s acquisition.

Moreover, the bank settled various litigation charges in the quarter. Operating losses increased sharply due to increased litigation expenses in the quarter. Operating losses went up 54% YoY to $454 million. Impact of increased operating loss is reflected in the efficiency ratio, which increased to 58.7% in the quarter from 58.4% in 4QFY15.

Volatile markets and increased regulations affected Wells Fargo’s investment banking results. Investment banking fees declined nearly 26% to $331 million in the quarter. Moreover, equity and debt securities gains declined 34% YoY and 12% YoY, respectively.

Despite reporting better-than-expected earnings, the bank’s stock closed down 0.51% at $48.78 on Thursday. Investors were likely concerned about the increase in loan provisions, driven mainly due to energy sector exposure. Provisions for credit losses increased 79% YoY to $1.09 billion. Wells Fargo’s oil and gas portfolio remained stressed due to low energy prices in the quarter.
Total allowance for credit losses stands at $12.7 billion in the quarter. According to Mr. Shrewsberry, allowance for the oil and gas portfolio increased by $504 million to $1.7 billion.

Bidness Etc believes the exposure to oil and gas companies has mounted concerns among investors, which resulted in the decline in the stock price after surpassing the earnings estimates. Wells Fargo stock was down 0.06% during after-market hours.

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