Wells Fargo 1Q20 Summary
Wells Fargo reported its first-quarter earnings on April 14, 2020. What follows is a summary of the bank’s results for the quarter.
Some financial results and metrics at the end of the quarter:
- Market Cap – $118.6B
- Price at the end of Quarter – $28.70
- Earnings Per Share – $0.01
- P/E – 10.14
- ROE – 0.09%
- ROA – 0.13
Overview of 10Q Earnings
Wells Fargo reported a net income of $653 million for the first quarter of 2020, down from the previous quarter level of $2873 million and the year-ago quarter of $5,860 million.
The decrease in earnings included $4 billion in provision expenses for credit losses of which $2.9 billion reserves for loans, $909 million for net-charge offs for loans, and $172 million of provision expense for debt securities which included $141 of reserve build and $31 in net charge-offs.
Wells Fargo also recognized a $950 million impairment, which is recognized in net gains(losses) from equities and debt securities. $621 million of net losses on equity securities were from deferred compensation plans investment results, which was offset largely from a decline of $598 million in employee benefits expense, again from a net gain(loss) from equity securities and employee benefits expense.
The quarter also saw $464 million in operating losses, and a $463 million gain from sales of residential mortgage loans, which was reclassified to held for sale in 2019.
Mortgage income of $379 million for the quarter, lower than the previous quarters total of $783 million. The losses were primarily driven by higher losses of valuations of Wells Fargo mortgage servicing rights assets as a result of assumption updates.
Wells Fargo diluted earnings of $0.01 for the first quarter of 2020 included the redemption of the Series K Preferred Stock, which reduced earnings by $0.06.
COVID Impacts
During the quarter, Covid-19 took hold, and Wells Fargo’s business was impacted as well as the company’s reaction to the pandemic impacted not only the business but the communities it operates.
In attempts to alleviate some of the pain felt by Wells Fargo customers the bank offered:
- Offered fee waivers
- 90-day payment suspensions for mortgage lenders who needed assistance
- Suspended voluntary evictions and repossessions.
- Introduced accounts with limited overdraft exposure or no exposure at all.
- Enacted measures to help employees with child care, payments for lost time at work because of illness, one-time payments to help keep employees afloat.
Wells Fargo was also active in the PPP loan process, and the asset cap was lifted by the government to allow Wells Fargo to assist the community in processing loan applications for the government programs.
Income Statement
For the first quarter of 2020, Wells Fargo saw revenue of $17.7 billion.
Net interest income, the main component of income for Wells Fargo, was up $122 million, or 1% compared to the previous quarter. The total for net interest income was $11,312 million.
The changes in net interest income reflect:
- $356 million higher in hedge ineffectiveness accounting results, which reflected large interest rate changes in the quarter.
- $84 million lower MBS premium amortization resulting from lower prepays.
- All of which was offset by the balance sheet repricing, which included the impact of a lower interest rate environment, and one fewer day in the quarter.
Wells Fargo also had average earning assets down $1.2 billion last quarter. Stemming from debt securities down $7 billion, mortgage loans held for sale down $3.6 billion, equity securities down $746 million, short-term investments/fed funds sold down $1.6 billion, and loans up to $8.5 billion.
Net interest margin (NIM) was up five bps to 2.58% compared to the last quarter of 2.53%. Wells attributes this eight bps increase to hedge ineffectiveness account results, two bps from MBS premium amortization, and -5bps from balance sheet mix and repricing.
Noninterest Income
Noninterest income was down the first quarter of 2020, 5% from the previous quarter, for a total of $6,405 million.
Deposit service charges were down $70 from fourth-quarter 2019, and these included seasonally lower overdraft fees. Trust and investment fees were up 9%, or $2 million from the previous quarter. Card fees were down 7%, or $128 million on lower interchange income due to seasonality, and the impact of Covid-19 on consumer spending.
Mortgage banking fees decreased 6%, or $404 million form the previous quarter, and net gains from trading activities were down $67 million on higher-trading losses in asset-back trading and credit trading. There were also net gains from debt securities of $245 million.
Noninterest Expenses
Noninterest expenses fell 10% to $13,048 million from the fourth quarter of 2019. The fall was driven primarily by:
- Personnel expenses were down $494 million
- Salaries were flat
- Commission and incentive commission was down $188 million
- Employee benefit expenses were down $306 million
- Technology and equipment expenses were down $141 from the fourth quarter of 2019.
- Operating losses down $1.5 billion on lower litigation accruals.
Balance Sheet
Loans for the first quarter of 2020 were up $47.6 billion, with commercial loans up to $52 billion on growth in commercial and industrial loans, plus commercial real estate loans.
Consumer loans were down $4.4 billion despite strong auto loan growth for the quarter.
Cash and short-term investments were down $6.1 billion from the previous quarter.
Deposits
Average deposits of $1.3 trillion were up $75.9 billion, or 6%. The increase was a year over year growth across all deposits drivers, which Wells attributes to the flight to safety because of the pandemic.
The average deposit cost of 52bps was down 13bps year over year, which is a reflection of the lower interest rate environment.
The business segment also saw an increase in deposits of $16.1 billion, or 1% growth over the previous quarter, again reflecting a flight to safety.
Period-end deposits grew 9% or $1.4 trillion compared to the previous quarter, across all business segments.
Loans
Wells Fargo saw total period ending loans of $1 trillion, which was up $61.6 billion or 6%. The bank saw an increase across all business lines, commercial loan growth was $55.5 billion, and consumer loans grew $6.1 billion on increases in auto loans and credit card loans.
The total average loans of $956 billion, grew $15 billion year over year, and by $8.5 billion over last quarter.
The total average yield for all loans yielded 4.20%, which was down 17 bps compared to last quarter, and 64 bps when compared to year over year numbers. All of which represent the change in interest rate environments and changes in the loan mix.
Impacts of the pandemic on Wells Fargo’s loan portfolio includes an increased focus on potential sectors that Wells Fargo has investments.
Wells has $14.3 billion of oil and gas outstanding loans, of which $9.5 billion are secured senior loans. Additionally, Wells has exposure to the retail industry to the tune of $43.8 billion in total commitments, and $27.8 billion in outstanding loans. Of which those commitments, restaurants include $5.8 billion or 21% of that mix.
Also exposed are $20.5 billion in total commitments to the entertainment and recreation industry, of which less than 1% is committed to the cruise lines.
There is also $17.9 billion in outstanding commitments to the transportation services industry, which includes air transportation of $2.4 billion.
Wells also has $131.2 billion of commitments to retail, including shopping centers, and $10.6 billion outstanding with hotels. And $20.8 billion committed to apartments.
With the adoption of CECL, Wells has a total allowance for credit losses for loans and debt securities of $12.2 billion
Wealth and Investment Management
The Wealth and Investment Management segment recorded net income of $463 million, which was 20% down year over year, and up 82% compared to last quarter.
Net interest income was down 5% from last quarter, primarily as a result of the lower interest rate environment.
Noninterest income was lower by 10% over the last quarter, which was driven by losses from equity securities. Noninterest expenses were down 17% last quarter due to a $362 million decline in deferred compensation plan expenses.
Some highlights from the segment:
- Total clients assets of $1.6 trillion, down 12% year over year, primarily from lower market valuations.
- Advisory assets of $499 billion, down 9% year over year, they were again driven by lower market valuations.
Capital Position
Wells Fargo currently has a Common Equity Tier 1 ratio of 10.7% at March 31, 2020. The level continues to be above the regulatory minimum of 9% and Wells Fargo’s internal target of 10%.
Period-end common shares outstanding were down 38 million shares, or 1% compared to the last quarter of 2020. Wells Fargo returned $5 billion to shareholders in the first quarter of 2020 in the form of $2.9 billion in share repurchases, and a quarterly dividend of $0.51. The dividend payments was an increase of 13% year over year.
Wells Fargo also issued:
- $2 billion of Non-Cumulative Perpetual Class A Preferred Stock, Series Z
- Redeemed $1.8 billion of their Fixed-to-Floating Rate Non-Cumulative Perpetual Class A Preferred Stock, Series K
- Redeemed $668 million of their Non-Cumulative Perpetual Class A Preferred Stock, Series T
Valuation
The valuation of Wells Fargo will be based on a dividend discount model, and I will share all the inputs I use to arrive at what the model tells us that Wells Fargo might be worth.
Attempting any valuation during this crisis is an attempt to determine a price that Wells Fargo might be attractive. There is obviously incredible uncertainty and volatility in the markets and the world.
Dividend Discount Model
Beta – 1.2
RiskFree Rate – 0.70%
Risk Premium – 6%
Required Rate of Return – 7.90%
Growth Rate of Dividend – 2.02%
Dividend Payout Ratio – 69
Retention Rate – 31
Current Annual Dividend – $2.04
Return on Equity – 6.5%
Current Price $24.48
Dividend Discount Valuation – $35.36
All numbers are based on figures taken from gurufocus.com and are based on the quarterly reports.
Final Thoughts
That wraps up our first quarter 2020 summary of the Wells Fargo. The article is meant to be an overview of the performance of Wells Fargo during the above quarter, and no guidance or opinions are dispensed.
Please do your due diligence before purchasing any company, and the use of this article is for information and entertainment purposes only.
Thanks for reading.
