Wells Fargo & Co (WFC)’s Loan Portfolio Deteriorates

Wells Fargo & Co (NYSE:WFC) delivered in-line earnings for the third quarter. The financial service providers have been expecting an interest rate hike to boost their bottom line, but it has yet to materialize. Therefore, the effects of lower interest rates continue to reflect in the financial numbers of the company. For instance, its interest margin slackened to 2.97% from 3.06% in the year-ago quarter. Aside from that, there are other key takeaways that are worth looking at them. The financial service provider is one of the few companies to show consistency in delivering  improving results over the years.

Deterioration In Loans Portfolio

Though the drop in oil price is generally welcomed by most of the communities, except the companies involved in it, it has its own effect on the financial services provider too. Therefore, Wells Fargo & Co (NYSE:WFC) is one of the financial institutions to have felt the pain of the oil bleeding among the energy firms. The company said that its oil and gas portfolio of loans witnessed deterioration in the most recent quarter results. As a result, its dependence on the portfolio has now been eliminated. However, the bank has been continuously bracing for possible losses on the oil and gas portfolio of loans.

Fortunately for the company, the impact of oil and gas loan portfolio has not reached the bottom line. Wells Fargo & Co (NYSE:WFC) managed to record 1.2% growth in profit to $5.8 billion in the third quarter while revenue rose to $21.88 billion from $21.21 billion in the previous year quarter. Analysts were expecting the company to deliver revenue of $21.76 billion for the third quarter. The financial services provider has already been pressured on profitability due to low-interest rates. The weakness in energy credits fueled by the significant drop in oil prices is only further compounding the difficult environment. Its CFO, John Shrewsberry, said during a call with analysts that the energy-services sector would incur greater challenges. He cautioned about the emergence of correlated stress in communities, which are relying on oil and gas.

Special Attention To Metropolitan Areas

Wells Fargo & Co (NYSE:WFC) has been focusing on loans in metropolitan areas where over 3% of jobs were directly linked to energy production. Though its performance of its holdings of residential mortgages enhanced, a difficult environment leading to a worst situation of loans to energy firm have only promoted it to hold steady the amount that it has earlier set aside to manage the losses. Shrewsberry said that the company released about $300 million from such funds in the third quarter. That should have boosted the firm’s income to over 3% in the third quarter.

In the recent years, Wells Fargo & Co (NYSE:WFC)’s bottom line has been boosted consistently by the release of loan-loss reserves. However, its recent third quarter results did not gain from it for the first time after 2010. Normally, banks release reserves only when they realize improvements in their credit quality. Loan charge-offs in its industrial, as well as, commercial loan portfolio, approximately doubled to $122 million from the year-ago quarter period. That included energy exposure too.

Analyst Comments

Centre Asset Management LLC’s Chief Investment Officer, James Abate, said that he was worried over the financial industry’s underestimation of the woes in the energy sector. That was probably due to the possibility of ‘spillover effects’. He owns 155,000 shares of Wells Fargo & Co (NYSE:WFC) and intends to slash the exposure to financial stock on lower interest rates, and a flattening yield curve. He was not impressed with the company’s results, especially on return on assets and return on equity.

The company’s executives said that the bank’s results were still profitable than its peers. Last month, Chesapeake Energy Corporation (NYSE:CHK) indicated that Wells Fargo & Co (NYSE:WFC) has linked its $4 billion credit facility to the untouched oil and gas reserves. Its total loans grew 7.7% to $903.23 billion from $838.88 billion in the previous year quarter. The financial services provider said that its profitability is better than its peers.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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