Wells Fargo (WFC) Q3 2017 earnings summary

Executive summary

• Q3 net income was $4.6B and EPS was $0.84, including a $1B discrete litigation accrual that reduced EPS by $0.20; underlying asset quality, liquidity and capital remained strong.

• Customer activity included 4% YoY average deposit growth, record Wealth and Investment Management client assets, and 5% growth in debit card purchase volume and consumer general purpose credit card balances.

• Transformation priorities included rebuilding customer trust, strengthening controls and culture, and delivering a $4B expense-reduction target.

Financial highlights

• Net income was $4.6B, down $1.2B QoQ; the decline primarily reflected the $1B litigation accrual, while Q2 included a $100M reserve release and $309M Pick-a-Pay portfolio sale gain.

• Revenue declined $402M YoY; net interest income rose $524M, while noninterest income fell $926M, mainly from lower mortgage banking revenue.

• Expenses increased $810M QoQ, driven by the litigation accrual; excluding the $1B accrual and other non-recurring expenses, FY17 efficiency ratio guidance was approximately 61%.

• Effective tax rate was 32.4%, including $186M of net discrete tax expense, primarily from the non-deductible litigation accrual.

Outlook and guidance

• FY17 net interest income growth guidance remained low- to mid-single digits; year-to-date growth was 5%, with 4Q expected to show little incremental growth.

• FY17 efficiency ratio target was approximately 61%, excluding the $1B litigation accrual and other non-recurring expenses; the goal was 59% or below at some point in 2018.

• Targeted annual expense reductions total $4B: 21% expected by end-2017, 50% by end-2018, with the remainder by end-2019; the second $2B is expected to benefit earnings and be fully recognized in 2020.

• Auto loans were expected to decline through most of 2018 and bottom in 2H18; credit card, first mortgage and commercial lending were expected to grow.

• A December rate increase, if implemented, was estimated to add $90M per quarter under a parallel-rate assumption; actual impact depends partly on retail deposit pricing response.