The scandal-hit Wells Fargo & Company (NYSE: WFC), which has fallen from grace, reported an unimpressive fiscal 2017 third-quarter revenue that missed the Street estimates. More importantly, Wells Fargo, which faces several lawsuits, has taken a charge of $1 billion related to mortgage-related litigation costs.
The bank, which was once regarded as one of the best banks in the US, has lost its reputation and continues to see a decline in revenues as revealed by the third-quarter results. Since the results were announced, the stock has lost about 4% so far to trade at $53 levels. We forecast the downtrend to continue due to the details given below.
The San Francisco, California-based company reported a 2% decline in 3Q17 revenues to $21.926 billion, from $22.328 billion in the third quarter of 2016. Net income for the September quarter declined 20% to $4.185 billion, or $0.84 per share, from $5.243 billion, or $1.03 per share, in the year-ago period.
Excluding a mortgage-related litigation charge of $0.20 per share, Wells Fargo reported non-GAAP earnings of 1.03 per share for the quarter ended September 2017. The Wall Street analysts had expected earnings of $1.03 per share on revenues of $21.93 billion.
The bank recorded an operating loss of $1.30 billion, mainly due to the litigation cost of $1 billion in the third quarter. The litigation costs were recorded by Wells Fargo’s community banking segment.
The quarterly net interest income increased 4%, or $524 million, to $12.48 billion, but missed FactSet estimate of $13.14 billion. Non-interest income declined 9% or $926 million to $9.50 billion. Net interest margin declined to 2.87%, from 2.90% in the previous quarter.
Non-interest expenses increased 8% y-o-y to $14.40 billion in the third quarter, higher than $13.60 billion anticipated by FactSet analysts’. The efficiency ratio increased to 65.5%, which is worse than Wells Fargo’s May 2017 guidance of between 60% and 61%. Wells Fargo has also set aside $450 million for potential losses from the recent hurricanes that hit Florida and Puerto Rico.
Mortgage originations declined 16% y-o-y to $59 billion. Likewise, mortgage applications declined 27% to $73 billion. Even auto loan sanctions plunged 47% to $4.30 billion during the quarter. The bank’s customer count fell 0.2% to 23.60 million. The return on equity (ROE) was 9.1%, the worst since 2010 when it fell below 10%. Notably, Wells Fargo had previously issued an ROE guidance range of 11% to 14%. Thus, considering the poor performance and the legal suits faced by the bank, we forecast the stock to remain bearish in the short-term.
The stock has formed a negative gap in the price chart and is trading below the 50-period exponential moving average. That indicates bearishness in the scrip. Furthermore, the bearishness is also confirmed by the stochastic indicator which is moving towards the bearish zone. The momentum indicator is also moving below the reading of 100. Thus, we anticipate a deeper decline in the stock of Wells Fargo.
We are planning to trade the downtrend by investing in a put option offered by one of our binary brokers. A strike price of about $54 is preferred for the trade. The option should remain valid for a period of one week.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
