Wells Fargo sets up a tough week for bank earnings reports next week
If this morning’s earnings report from Wells Fargo (WFC) was any indication, this isn’t going to be a very pretty earnings season for the shares of the largest U.S. banks.
Wells Fargo reported record net income for the fourth quarter and the full 2012 year, and record earnings per share of 91 cents. That was a 25% jump from the fourth quarter of 2011. Revenue climbed by 7% year over year. Deposits grew during the quarter by 3% and the bank’s core loan portfolio increased by the same percentage. Charge-offs against bad loans were lower by 19% from the fourth quarter of 2012.
And yet the stock closed down 1.12% because all that Wall Street paid attention to was the shrinking net interest margin at Wells Fargo. With the Federal Reserve doing all it can to bring long-term interest rates down, net interest margins—the difference between what a bank pays for the money it lends and what a bank gets paid on its loans—has been falling across the sector and is set to continue to fall. The net interest margin fell again at Wells Fargo in the fourth quarter, declining another 0.1 percentage point to 3.56%.
I think a lot of analysts share the opinion voiced after earnings by Credit Suisse that Wells Fargo is the “best positioned among our banks for rising short-term interest rates,” but with the Fed saying that it plans to keep rates at current low levels until 2015, I could hear the impatience in the conference call today. The bank said it expects to deliver rising net interest margins by the second half of 2013 through further cost cutting but analysts want to see the cuts and the results. I think the bank’s announcement that it has asked the Federal Reserve for approval to raise its dividend is soothing to Wall Street, but analysts also recognize that it could be the middle of 2013 before the bank gets the go ahead to increase its pay out.
Next week is the heart of bank earnings season with JPMorgan Chase (JPM) and US Bancorp (USB) scheduled to report on Wednesday, January 16, and Bank of America (BAC) and Citigroup (C) on deck for Thursday, January 17. Last quarter US Bancorp was one of the few big banks to manage an increase in net interest margin and that increase was a meager 1 basis point (or one one-hundredth of a percentage point.) This earnings season the market will be watching to see if anyone, even US Bancorp, can pull off that trick. (US Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did own shares of US Bancorp as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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Don’t get me wrong. I hate banks and the scum who run them. However I would like to see them be able to make a fair profit on traditional banking transactions, i.e. lending money at a higher rate than they have to pay depositors. The rate paid depositors is essentially zero — it cant go lower. With the Fed actions effectively capping the return they can get for loaning money, I see them turning ever more to the scurrilous fees and high risk “investment” practices that brought on the financial crisis to begin with. They are bigger than they were before after all the forced mergers and buy-outs, so the moral hazard is worse than it was before — they now know the government won’t let them fail regardless of the stupidity of risks they take. The government won’t let another Lehman occur, regardless of how thoroughly logical and morally necessary it might be.
Ydept, I am afraid you are right. We could however change 2 important factors: 1. wash out the shareholders should the State have to intervene again, which will encourage shareholders to look into their banks practices more closely. 2. the political message being clear, put to jail the managers of the banks which keep taking these systemic risks, no questions asked.