Wells Fargo Third Quarter Results: What Investors Need to Know

Wells fargo (NYSE: WFC) does a good job of getting out of its woes of the past few years, but there are still lingering effects that keep it from delivering numbers as strong as its peers at the big banks. In this fool live Video clip, recorded on October 18, Fool.com contributor Matt Frankel and Focus on industry Host Jason Moser discusses the numbers and what they mean for investors.

Jason Moser: Speaking of Wells Fargo, it feels like things are slowly but surely coming back for them. Stock continues to have a good year and looks like it was a pretty good one, maybe nothing too remarkable, but it felt like it was a pretty good quarter, it kept them on the right direction.

Matt Frankel: Yeah, it was a good quarter. Like I said, I would have given JP Morgan (NYSE: JPM) a B, I would have given Bank of America (NYSE: BAC) probably a B + or an A-, Wells Fargo will get like a B- to a C. Not a bad quarterback, but like you said, nothing very good. They exceeded profit expectations, mainly because of a release of reserves. They released $ 1.65 billion.

Remember, Wells Fargo is the most client-oriented of the five, which means it’s not really investment banking focused. They lend money, that’s how they make their money. Net interest income fell 5% year-on-year. Keep in mind that I mentioned that Bank of America’s was up 10% so their interest income is moving in the opposite direction, which is concerning. This is probably the most important thing of the quarter. One thing that’s really impressive, they spent $ 5.3 billion on buybacks in the third quarter alone.

Moser: Wow.

Frankel: It’s an aggressive redemption pace.

Moser: That is to say.

Frankel: I don’t have the number in front of me, but I want to say that Wells Fargo’s total market cap is in the order of $ 200 billion.

Moser: Yeah, that rings true.

Frankel: That means they bought back more than 2.5% of their stake in the third quarter alone.

Moser: Yes, $ 193 billion. I see it right now on Capital IQ.

Frankel: It’s a great rhythm of redemption.

Moser: He is.

Frankel: Consumer loans remain down, year over year, down 2% from the second quarter. Not very worrying, pretty much in line with his peers. Deposits continue to rise and Wells Fargo is doing well, with a return on equity of 11.1%, which is above that magic 10% threshold. Strong neighborhood but nothing to jump up and down the street.

Moser: Do you get the impression that the headwinds they are facing on the net interest income side are due in part to regulators still maintaining control over growth, so to speak. They still can’t really grow taller. You are not going to bring these deposits. We see with JPMorgan and Bank of America for example, the deposit growth numbers are robust. Wells is going to be limited in what they can do there. You get the impression that this is something that plays into that net interest income. If so, it looks like it may be a bit more of a short-term concern than a long-term one.

Frankel: Absoutely. When their peers increase their deposit base to 20% year over year, as in some of these cases. JPMorgan’s was up 19% year over year. Wells Fargo’s grew less than 4% year-on-year.

Moser: Yes.

Frankel: When you have that big difference in deposit growth, of course, it gives other banks the advantage of earning more interest because it gives them more money to lend. Even though their loan portfolio isn’t necessarily growing as fast as they would like, it still gives them that great capital base to lend on and make money on, so Wells Fargo is definitely a handicap for them in this moment.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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