Monday, April 23, 2012

Wells Fargo Earnings Grind Higher to Another Record on Slowing Growth

Wells Fargo reported another record financial performance, grinding higher on small incremental gains, as expected. CEO John Stumpf continues a conservative and viable strategy which has maintained strong levels of capital, low credit losses, and resulted in a very good return on assets. Though not exciting with quick returns for WFC long traders, the business plan has been successful.

Financial performance appears to be peaking as incremental quarterly gains are a result of lower credit losses, some periodic expense containment, and net loans are not increasing. That is, higher-yielding net loans (56% of total assets) are decreasing while lower-yielding cash and investments (30% of total assets) are increasing.

That leaves some profitability to be squeezed out of lower expenses or higher revenues such as fees. External acquisitions and/or increased loan demand are about the only avenues remaining for accelerating growth to a material degree. Credit losses decreased at a faster rate than net loans this quarter, reversing and eliminating a possible concern from the prior quarter.

Wells Fargo Income Statement Q1 2012 Wells Fargo reported net revenues of $21.64 billion, record net income of $4.25 billion, and record earnings per share of $0.75. For QoQ, these were +5%, +3%, and +3%, respectively. For YoY, these were +6%, +13%, and +12%, respectively. The operating margin of 31% increased to the second highest in several years and the net margin of about 20% was flat QoQ.

Wells Fargo Balance Sheet Q1 2012 Total assets increased to a record $1.33 trillion. The capital to assets ratio increased slightly to a strong 11.01%. Return on Assets improved slightly to a very strong 1.27%. The operating expense ratio is stable at 56%.

Wells Fargo Earnings per Share Current Earnings per Share of $1.31 is another record high, and have increased for 9 consecutive quarters.

Wells Fargo Net Revenues, Operating Income, Net Income Current Net Revenues of $21.64 billion are a 9-quarter high. Current Operating Income of $6.65 billion is an all-time high. Current Net Income of $4.25 billion is the 8th consecutive quarterly increase and another all-time high.

Wells Fargo Operating Margin and Net Margin Current Operating Margin of 30.73% is the second highest in several years. Current Net Margin of 19.63% decreased slightly QoQ but is historically above average.

Wells Fargo Return on Assets Current Return on Assets of 1.27% is a multi-year high and well above the banking benchmark of +1.00%. The historical (chart) average ROA is +1.08%.

Wells Fargo Return Growth Rates YoY The chart below shows the slowing incremental growth rates in earnings per share YoY. Current Net Revenues Growth YoY of +6.43% reverses the negative YoY declines. Current Earnings per Share Growth YoY of +11.94% continues the slow decrease.

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