Wells Fargo & Co (NYSE: WFC) kicked off 2018 with a lackluster fourth quarter earnings report on Friday. In what many investors consider the perfect environment for big banks, Wells Fargo topped earnings expectations, but revenue came up a bit soft.
Wells Fargo stock initially dipped by 1.1 percent in Friday’s pre-market trading after the bank reported adjusted earnings per share of $1.16 on revenue of $22 billion. Wall Street analysts has been anticipating EPS of $1.07 on revenue of $22.3 billion.
Wells Fargo reported $12.3 billion in net interest income, down $136 million from the third quarter. The company said the decline was due to a one-time $183 million adjustment related to leveraged leases impacted by recently approved tax reform.
Net interest margin, a key metric for measuring the core banking business, was 2.84 percent, down slightly from 2.87 percent in the third quarter. Analysts were expecting net interest margin to remain flat at 2.87 percent.
Wells Fargo also reported a $3.25 billion pre-tax expense due to litigation accruals as it continues to deal with the fallout from its fraudulent account scandal back in 2016.
Wells Fargo reported a record $14.5 billion in capital returns in 2017 via dividends and share repurchases, up 16 percent from 2016.
“We’ve made progress on our efficiency initiatives and remain committed to our target of $2 billion of expense reductions by the end of 2018, which are being used to support our investments in the business, and an additional $2 billion by the end of 2019,” chief financial officer John Shrewsberry says.
Wells Fargo and J.P. Morgan Chase & Co. (JPM), which also reported earnings on Friday morning, both initially traded lower after the banks failed to wow the market. J.P. Morgan reported EPS of $1.76 on revenue of $25.4 billion, topping analyst estimates of $1.69 and $25.1 billion, respectively.
Given the potentially bullish environment for banks in 2018, including tax cuts, economic growth, and rising interest rates, investor expectations may have simply crept a bit too high in the short term.
Vertical Group analyst Dick Bove says 2018 will be such a different environment for big banks that investors should mostly ignore the final report of 2017.
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