Categories Earnings, Finance

What lies ahead for Wells Fargo (WFC) after a COVID-19-hit quarter

Wells Fargo does not expect costs to increase meaningfully during the year

Wells Fargo & Company (NYSE: WFC) took a hit to its first quarter 2020 earnings results from the ongoing coronavirus outbreak. The company reported net income of $653 million and EPS of $0.01, which were impacted by loan loss reserves, impairment of securities, and redemption of preferred securities.

The quarterly results included a reserve build of $3.1 billion for loans and debt securities, $950 million of securities impairment, predominantly related to equity securities, and a negative $0.06 impact related to the redemption of the company’s Series K preferred stock.

Amid the pandemic, Wells Fargo saw HQLA bid-ask spreads, daily volatility, and credit spreads increase 100% to 500% versus normalized levels prior to the crisis.

Consumer spend is down over 25% year-over-year, and while there is a spike in food and drug spend, other spend has declined significantly. New auto sales have come down and there has been a drop in manufacturing as businesses cut back on orders. Commodity prices have fallen 24%, reflecting a weakness in global demand.

Wells Fargo is providing significant credit to its clients. The company deferred over 1 million payments, comprising almost $2.8 billion of principal and interest payments and provided over 900,000 fee waivers exceeding $30 million. It has suspended residential property foreclosure sales, evictions and involuntary auto repossessions.

The company mentioned on its conference call that it would be able to create more capacity to help customers by reducing non-operational deposits mainly in the financial institutions area, through its securities financing footprint, and its utilization of external repo as a financing source.

With regards to maintaining dividends, Wells Fargo said it has strong capital ratios but its balance sheet cap limits its ability to deploy capital internally. The company believes the timing and pace of the economic recovery will determine the earnings capacity to support the dividends going forward.

Wells Fargo does not expect costs to increase meaningfully during the year. There are revenue-related costs that might be lower depending on business conditions and the company’s performance. Travel and entertainment spend is almost down to zero as people stay at home due to the pandemic. There could be an increase in technology costs due to people working from home but overall it is not expected to be significant.

The company’s shares were down over 6% in afternoon hours on Wednesday.

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