Wells Fargo (WFC) Q3 2018 earnings summary

Executive summary

• Q3 net income was $6.0B, or $1.13 per diluted share; revenue grew and noninterest expense declined YoY and QoQ, with positive operating leverage on both comparisons.

• Business momentum included growth in primary consumer checking, card usage and originations across auto, small business, home equity and personal loans and lines.

Financial highlights

• Net interest income increased $31M QoQ; NIM rose 1 bp to 2.94%, as lower-yielding assets declined and hedge ineffectiveness accounting provided a modest benefit.

• Noninterest income rose $357M QoQ, including higher other income, market-sensitive revenue, mortgage banking, deposit service charges and card fees.

• Noninterest expense declined $219M, or 2%, QoQ and $588M, or 4%, YoY; lower operating losses drove the annual decline.

• Primary consumer checking customers rose 1.7% YoY; debit card purchase volume increased 9% and general-purpose credit card volume increased 7%.

Outlook and guidance

• Annual expense targets are $53.5B–$54.5B for 2018, $52B–$53B for 2019 and $50B–$51B for 2020; each includes ~$600M in typical operating losses and excludes litigation and remediation accruals and penalties.

• Headcount is expected to decline 5%–10% over three years through displacement and normal attrition; expense targets remain subject to revenue mix and extraordinary business opportunities.

• FY net interest income is expected to be flat to slightly higher on a GAAP basis; Q4 effective tax rate is expected to be ~19%, excluding future discrete items.

• Auto portfolio balances are expected to begin growing around mid-2019; Q4 mortgage originations are expected to decline seasonally, with production margin within the FY range of 77–97 bps.

• The May 2020 simulation indicated 15% ROE and 17% ROTCE under flat revenue assumptions; management said a broad range of outcomes could support those returns.