By Saul GriffithSecond-quarter earnings per share of $1.01 at Wells Fargo & Co. (NYSE:WFC) were ...

1. Rising Commercial Loans At Wells Fargo Augur Well For The
Economy - Wells Fargo & Co. (NYSE:WFC)
By Saul Griffith
Second-quarter earnings per share of $1.01 at Wells Fargo & Co. (NYSE:WFC) were in line with
market consensus and a whisker ahead of the $1.00 estimated by Credit Suisse analysts Moshe
Orenbuch, Jill Glaser Shea and Lesley Robertshaw.
"Net interest income was slightly higher than our forecasts given less NIM pressure than expected
(down 5 bps in the quarter) and better growth in earning assets," observe the analysts in their July
11, 2014 research note.
Following the bank's earnings report, the analysts have raised their EPS estimates for 2014 to $4.15
(earlier estimated $4.10), 2015 to $4.30 (from $4.25) and for 2016 to $4.65 (from $4.60).
Encouraging growth in loans
The bank reported an increase of $10.3 billion in commercial loans and of $4.8 billion in consumer
loans, the latter comprising mostly of auto, credit and non-conforming mortgages. These increases
helped boost the core loan portfolio to $764 billion.
The largest U.S. bank in terms of market value, Wells Fargo & Co. is often viewed as a bellwether
for the economy and the rise in its commercial and consumer loans may be interpreted as a positive
sign on the economic recovery.
Wells Fargo: Decline in NPAs
Wells Fargo & Co. showed continued improvement in the quality of its credit operations. The bank
made a provision of $217 million versus $481 million anticipated by Credit Suisse Group AG

2. (NYSE:CS), while net charge-offs was down 13% q-on-q to $717 million. NPAs have declined for
seven consecutive quarters, according to the bank.
Moreover, reserve drawdown was higher at $500 million compared to the analysts' estimate of $350
million. "Absent significant deterioration in the economy, we expect reserve releases through 2014
to continue, though at a moderating pace," says Credit Suisse.
On the conference call, the bank's CFO,
John Shrewsbury confirmed this, saying
future releases would be lower as "the
rate of credit improvement slows and
the loan portfolio continues to grow."
Fees, Net Interest Margin (NIM) and
expenses
The bank's net interest income (the
difference between its borrowing costs
and lending income) was $10.8 billion.
As aforesaid, the bank experienced a
slight decline in its NIM of 5 bps, but the impact of this was offset because of higher interest income
due to a growth of 3% (q-on-q) in interest earning assets.
The bank's fee income of $10.2 billion grew 2% q-on-q (4% y-on-y) primarily due to higher fees
generated in trust and investment banking and mortgage banking.
Operating expenses of $12.2 billion remained within the bank's targeted efficiency ratio of 55-59%.
Outlook
After reporting back-to-back increases in EPS for 16 straight quarters, this was the first quarter
when Wells Fargo & Co. failed in this regard, ending a streak that began in 2009.
"Wells Fargo is best positioned among our banks for rising short-term interest rates, but its
mortgage business will continue to experience pressure over the near-term with a decline in
refinance volumes-leading to some near-term revenue pressure," says Credit Suisse, however.
The analysts have a price target of $56 on Wells Fargo & Co. and a rating of Neutral.
The Wells Fargo & Co.'s stock has gained 8.7% over the quarter, and is up 26.39% during the past
year. Year to date it has appreciated by 15.01%.
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Disclosure: None

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