Wells Fargo struggling ahead of Q3 results

Wells Fargo will announce its third-quarter results on 14 October, and climbing costs combined with falling margins from mortgage lending is putting pressure on the stock.

A Wells Fargo sign at a branch
Source: Bloomberg

Wells Fargo's share price has performed very well since it emerged from the credit crisis. The mortgage provider is expanding its loan book, which reflects its willingness to lend along with a credit appetite from potential home owners. Like other banks it has a wide range of services, but mortgages is its biggest earner. Even though it isn’t as potentially profitable as trading desk income, it is a slow and steady way to make money without major risk. The bank is considered a more secure stock in the US financial field.

Costs at the bank are higher, and since the net interest margin is slipping the profitability is being hurt. The bank saw a considerable jump in mortgage lending between the first and second quarter, but as the profit margin on lending is being squeezed it is working hard to not fall behind. The bank shouldn’t over-lend to offset the falling net interest margin, and when the US central bank increases interest rates that is when its fortunes will turn.

When Wells Fargo reveals its third-quarter results the market is expecting revenue and EPS of $21.81 and $1.04 respectively. The banks’ second-quarter revenue was $21.31 billion, and the EPS came in at $1.03. The mortgage lender will reveal its full-year numbers in January 2016, and the market is anticipating revenue and EPS of $86.6 billion and $4.15 respectively. These forecasts represent a 1.6% increase in revenue and a 1.2% rise in EPS.

Equity analysts are bullish on Wells Fargo, with 23 buys, 13 holds, and three sells from 39 ratings. The average target price is $59.59, which is 14% above the current price. Investment banks are more bullish on Citigroup, and out of the 35 recommendations, 30 are buys, three are holds, and two are sells. The average target price is $64.09, 25% above the current price.

The number of short positions being taken out on Wells Fargo is at a 12-month high.

The stock had a choppy September, but the bias is to the upside. The resistance at $54 is the first target, and a move above it will bring $60 into play. Any move lower in the stock will find support at $50, and should that be broken, then support will be found in the $47.84-$46.44 region. 

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