If you think Wells Fargo & Co. (ticker: WFC) has completely shaken off the massive 2016 scandal that saw the company admit to opening more than 2 million fraudulent accounts in customers’ names … well, it hasn’t.
WFC helps kick off the first-quarter earnings season on Thursday, and the expectations are understandably muted. One big macro driver for bank stocks failed to materialize over the past three months, plus Wells Fargo still has a bevy of its own issues hanging around its neck.
[See: 11 Ways to Buy Bank Stocks.]
The headline numbers. Analysts’ expectations out of Wells Fargo can best be summed up as “shrugworthy.” The pros believe WFC will post earnings of 97 cents per share, off 2 percent from last year, on revenues estimated to grow 0.5 percent to $22.31 billion.
For comparison’s sake, Bank of America Corp. ( BAC) is projected to see year-over-year growth of 25 percent. Citigroup ( C) is looking at growth of 12.7 percent, and J.P. Morgan Chase & Co. ( JPM) is projecting growth of 12.6 percent.
These estimates reflect the idea that Wells Fargo still has some rubble to clear from its self-made mess.
Why isn’t Wells Fargo in the clear yet? Already, Wells Fargo’s account scandal has already warranted a record $100 million penalty from the Consumer Financial Protection Bureau, as well as an additional $85 million in other fines. WFC senior executives can kiss their cash bonuses goodbye, too.
The transgression also claimed the jobs of roughly 5,300 workers, plus several high-level executives and other managers that were booted or left voluntarily. The highest-profile workforce loss, of course, was CEO John Stumpf, long credited for keeping Wells Fargo on the straight and narrow. Replacing him in October 2016 was COO Tim Sloan.
That damage is in the past, but Wells Fargo still faces related hurdles going forward.
For instance, in March, WFC said February’s applications for credit cards plunged 55 percent from last year. Mary Mack, Wells’ senior executive vice president of community banking, said in a statement that “February trends were generally similar to January’s and were within our expectations” … but that doesn’t soften the blow of the worst decline in credit-card apps since Wells fessed up to its transgressions in September 2016. That’s likely helping to tamp down first-quarter expectations.
The Wall Street Journal also recently reported that an internal probe found Wells Fargo workers falsely reporting customer sales figures, forcing the company to overhaul its credit card processing business and raising questions “about the scope of the sales scandal that hit the lender’s retail business last year.”
[Read: Buffett Finally Speaks Out on Wells Fargo Scandal.]
And the Office of the Comptroller of the Currency just lowered Wells Fargo’s Community Reinvestment Act rating — which deals with community bank law compliance, and can affect banks’ community lending businesses — to below “outstanding” for the first time since these scores came public in 1994. Most of the violations weren’t connected to the scandal, but still involved “an extensive and pervasive pattern and practice of violations across multiple lines of business within the bank.” The OCC also removed Bradley Linskens, Wells Fargo’s senior national bank examiner — a position dedicated to ensuring ethical and legal compliance — last week.
Perhaps looming largest: Wells Fargo still must face the results of a massive independent investigation, the results of which are expected to come before WFC’s April 25 shareholder meeting. Proxy adviser Institutional Shareholder Services is already urging Wells stock owners to vote against 12 of the bank’s 15 directors.
Tailwinds for WFC stock. Wells Fargo (and most other banks) were promised two macro tailwinds over the past two months — financial deregulation by the Trump administration, and interest-rate hikes. While the derailing of the American Health Care Act has forced the White House to kick the former can down the road, the Federal Reserve did hike rates a quarter-point after its December Federal Open Market Committee meeting, then again in March. That should help Wells’ net interest spread, and has analysts hopeful for higher margins in its first-quarter results.
And even on the scandal front, Brian Kleinhanzl and Michael Brown at Keefe, Bruyette & Woods believe WFC is making progress on at least one point. The company in March said it was setting aside $110 million to go toward customers affected by the bogus accounts, and KBW’s analysts say “Wells Fargo has resolved another overhang related to the cross-sell scandal and the long-tail of potential negative outcomes is growing shorter.”
Lastly, Wells has been gifted a low earnings bar, so if it can somehow produce results that surprise wildly to the upside, WFC stock might get some lift.
But given everything that Wells Fargo and analysts have already telegraphed, don’t hold your breath.
More Earnings in Focus
JPMorgan Chase & Co. Wall Street is expecting much better fortunes — including a double-digit bump to the top line — for JPMorgan, which also reports Thursday morning. Analysts have been mostly quiet on JPM in the past couple months, though Credit Suisse, which has the bank at “outperform,” raised its price target from $96 to $99 per share on expectations for higher earnings in full-year 2017 and 2018 on higher interest rates and “more favorable commercial credit quality trends.”
Delta Air Lines (DAL). Wall Street isn’t expecting much from Delta when it reports earnings Wednesday morning. Analysts are looking for profits of 74 cents per share, down from the year-ago period’s 82 cents. Delta already said it expects passenger revenue per available seat mile to decline 0.5 percent for the first quarter — the second revision lower from an original forecast ranging from breakeven to a 2 percent increase. The news caused Cowen to tick its price target slightly lower, from $60 to $58. Also dogging DAL is the cancellation of several thousand flights across multiple days amid “unprecedented” storms that slammed Atlanta, its primary hub.
This Week’s Earnings Calendar
Tuesday. Bank of the Ozarks ( OZRK)
Wednesday. Fastenal Co. ( FAST), Pier 1 Imports ( PIR)
[See: 7 of the Best Stocks to Buy in 2017.]
Thursday. Citigroup, PNC Financial Services Group ( PNC), Taiwan Semiconductor Mfg. Co. ( TSM), Yingli Green Energy Holding Co. ( YGE)
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Wells Fargo & Co (WFC) Earnings Will Still Have Scandal Scars originally appeared on usnews.com
