The third-largest bank in the US by assets, Wells Fargo & Company (NYSE: WFC), reported its fiscal 2017 second-quarter earnings that beat analysts’ estimates. However, the bank missed Q2 revenue expectations. Additionally, the issues discussed below indicates that the stock would remain range-bound with bearish bias in the short-term.
The San Francisco-based lender reported fiscal 2017 second-quarter net income of $5.81 billion or $1.07 per share on revenues of $22.169 billion. In the second quarter of fiscal 2016, Wells Fargo announced earnings of $5.56 billion or $1.01 per share on revenues of $22.162 billion. The consensus estimates of analysts surveyed by Thomson Reuters were earnings of $1.01 per share on revenues of $22.47 billion.
But for the gain of $186 million or $0.04 per share from the sale of Wells Fargo Insurance Services, the 2Q17 net income would have been lower than that of last year. Wells Fargo also benefited from a lower income tax expense of $2.225 billion in Q2 2017, compared with $2.649 billion in Q2 2016.
Segment-wise, community banking income declined to $2.993 billion, from $3.18 billion last year. Wholesale banking income was $2.388 billion in Q2 2017, compared with $2.073 billion in the same period of 2016. Wealth and investment management income was $682 million, up $98 million from $584 million recorded last year.
During the second quarter, net interest income increased 6% y-o-y to $12.48 billion. However, total non-interest income declined 7% y-o-y to $9.69 billion. In particular, mortgage banking revenue was $1.148 billion in the June quarter, down 19% from $1.414 billion in the corresponding period of 2016. Similarly, gains from trading activities declined 28% to $237 million, while gains from debt securities declined 73% to $120 million.
At the end of the second quarter, the common equity tier 1 ratio increased to 11.6%, from 10.6% reported in the year-ago period. However, the efficiency ratio declined to 61.1% in the recent quarter, from 58.1% in the corresponding period of 2016.
The return on equity increased marginally to 11.95%, from 11.70% last year. Wells Fargo also raised its quarterly dividend by a penny to $0.39 per share and announced its intention to repurchase shares worth $11.5 billion. To improve performance, the bank is targeting cost savings to the tune of $4 billion by 2019. Thus, on the basis of flat revenue growth, a decline in mortgage income, and an unimpressive efficiency ratio, we forecast the stock to remain weak in the near future.
Technically, the stock is forming a descending triangle as shown in the image below. The stock is also facing resistance at 55.50. Furthermore, the stochastic oscillator is declining from the bullish zone. Thus, we can expect a decline in the stock.
To benefit from the impending decline of Wells Fargo stock, we wish to purchase a low or below contract. A strike price of $55 is ideal for the binary option trade. Finally, it would be advantageous to have the contract valid for a period of one week.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
