Wells Fargo Stock Falls After Missing the Mark on Earnings

by | Oct 16, 2019 | Markets

Wells Fargo’s Q3 revenue was impressive, but the bank fell short on earnings and net income.

This week, Wells Fargo was one of the first banks to kick off earnings season. Shares of Wells Fargo have been trading slightly higher in recent weeks, ever since the company announced it found a new CEO. 

However, the company’s third-quarter earnings produced mixed results. The bank’s revenue was in line with what investors were expecting, but it fell slightly short on earnings. 

Here is an overview of the earnings report, as well as what we can expect from Wells Fargo going forward.

Wells Fargo’s Q3 wins and losses

During the third quarter, Wells Fargo’s revenue hit $22.0 billion, which easily surpassed forecasts of $21.19 billion. But earnings fell short by 8 cents, and the bank’s net income was $4.6 billion, which is down from $6.0 billion a year earlier. 

The earnings miss concerns investors because it shows that Wells Fargo is less profitable than it was a year earlier. By digging deeper to figure out the source of the problem, there are several key factors you uncover.

The most apparent culprit we can point to is the bank’s $1.6 billion legal charges. This malpractice charge stemmed from Wells Fargo’s previous account scandals. The legal charge alone reduced the bank’s earnings significantly. 

Wells Fargo’s net interest margin also fell 28 points during the third quarter to reach 2.66%. This can be partially attributed to the Federal Reserve cutting interest rates by a point during the third quarter.

However, it wasn’t all bad news for the bank since their deposits and loans grew slightly. And the bank’s net charge-offs are down from a year earlier. 

What’s next for Wells Fargo?

Going forward, Wells Fargo will still have several headwinds to contend with. The bank will have to continue to deal with the fallout of the fraudulent account scandal. And Federal Reserve still has a $2tn asset cap on Wells Fargo, which the bank will continue to operate under for at least the remainder of the year.

But Wells Fargo does will have a new CEO at the helm during the fourth quarter. Charles Scharf will step into the role of Wells Fargo CEO on Oct. 21, and hopefully, he can usher in the change the bank needs.