The big threat to Wells Fargo profit streak: loan loss reserves

Wells Fargo (WFC -0.6%) CFO John Shrewsberry warns investors in the bank's earnings conference call that loan loss reserves - an important source of profits for WFC and other banks as credit quality has improved over the past four years - will dwindle, as WFC expects to release reserves at a lower rate going forward.

WFC reported a slight gain in profits for Q2 yet revenue slipped, as did its net interest margin; if the trend continues, it will become more difficult without the release of reserves to keep growing earnings and maintain its 16-quarter streak of higher profits.

In the call, one analyst said he guessed that “Wall Street will be somewhat shocked” when the reserve releases and the ensuing profit boost evaporate.

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Comments (3)
  • db313706
    , contributor
    Comments (223) | Send Message
    If all the other major banks are due to feel the same pressure from the same macro forces...


    The fact remains that this is probably, still, the best managed bank. Diversifying away from toxic assets, respectable yield (and regularly climbing), and in an environment where rates can really go nowhere but up.


    Long WFC.
    11 Jul 2014, 02:46 PM Reply Like
  • rdullom
    , contributor
    Comments (17) | Send Message
    Anyone who is familiar with the banking industry and has studied and/or analyzed bank profits should not be shocked that reserve releases will dissipate over time. Earnings created by the reversal of previous loan loss reserves is not high quality earnings and investors typically do not put a high multiple on earnings from this source. Although the NIM may continue to be flat to down in coming quarters, an eventual rise in rates should help to grow the NIM Margins are currently still below what could be termed normalized levels.
    11 Jul 2014, 03:43 PM Reply Like
  • longinthetooth
    , contributor
    Comments (58) | Send Message
    Three beautiful things with WFC reflected in the earnings announcement...(a) strong organic, low cost deposit growth; (b) strong, high quality loan demand and growth in all customer segments; (c) very well-managed capital accounts regarding "safety and soundness" and shareholder focus..i.e., consistent buybacks and strong dividend increases. The year-over-year progress was very good. The first quarter results contained a one-time deferred tax gain...setting this aside, quarter-to-quarter progress was good as well. As the yield curve moves in quarters ahead, spread income will come easier for WFC and banks generally. WFC...a great core holding in my view.
    12 Jul 2014, 08:31 AM Reply Like
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