Wells Fargo reported better than expected second quarter earnings before the bell Friday. Wells Fargo reported its net income $1.25 a share on revenue of $20.5 billion, ahead of analysts expecting $1.16 a share on revenue of $20.1 billion. Net interest income of $13.2 billion came in well above Wall Street estimates of $12.8 billion. Wells Fargo cautioned on commercial real estate and higher credit card loans increasing its allowance for possible credit losses by $949 million in the quarter. WFC reported along with two of the largest U.S. lenders, JPMorgan Chase (JPM) and Citigroup (C).
Wells Fargo Q2 23 Earnings
Q2 2023 earnings released at 7 a.m. ET; conference call at 12 p.m. ET
- EPS: $1.25 (exp $1.16)
- Revenue: $20.53B (exp $20.13B)
- Net Interest Income $13.16B (est $12.89B)
- Total Avg. Deposits $1.35T (est $1.35T)
- Provision For Credit Losses $1.71B (est $1.55B) Increased by $949 million in the quarter,
- Loans for the quarter of $945.9 billion below analysts’ expectations of $949.4 billion. In the same quarter last year, loans were $926.6 billion.
- Deposits of $1.347 trillion below analysts’ estimates of $1.352 trillion. Declined from deposits from this time last year of $1.445 trillion.
- Repurchased 100.2M Shares Or $4B In 2Q
WFC: Stock Market Reaction
- 43.59 ▼ -0.12 (-0.29%) today
- 43.59 ▲ +4.84 (+12.49%) past year
- 43.59 ▼ -12.82 (-22.73%) past 5 years
- 52wk High $48.84
- 52wk Low $35.25
Net Interest Income Benefit
Net interest income in the quarter rose 29 per cent from a year ago to nearly $14bn, compared with 44 per cent and 16 per cent at JPMorgan and Citigroup, respectively.
The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses. The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.
The Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing banks to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
Citi benefited from net interest income, and now has the opportunity to extend duration at higher rates. Net interest income of $13.2 billion came in above Wall Street estimates of $12.8 billion. That margin had been rising significantly from quarter to quarter as its lending income more than doubled.
Caution Remains
“While we haven’t seen significant losses in our office portfolio to date, we are reserving for the weakness that we expect to play out in that market over time,” Chief Executive Charlie Scharf said in the earnings release.
Investors remain cognizant that WFC has a multiyear effort to satisfy regulatory requirements, with setbacks likely to continue along the way. There is that reputational risk hangs over the bank after a series of scandals that included creating fake customer accounts.
- $3.7 billion in 2022 for consumer abuses
- $3 billion in 2020 for fraud
- $2 billion in 2018 for toxic securities abuses
- $1.9 billion in 2013 for banking violations
- $5.3 billion in 2012 for mortgage abuses
Outlook
“The U.S. economy continues to perform better than many had expected, and although there will likely be continued economic slowing and uncertainty remains, it is quite possible the range of scenarios will narrow over the next few quarters. We remain prepared for a variety of scenarios,” Scharf added.
Wells Fargo was once the No. 1 player in mortgages, has stepped back from the housing market. It recently laid off hundreds of mortgage bankers as part of a sweeping round of cuts triggered by the bank’s recent strategic shift.
Wells Fargo Last Quarter Earnings
Higher rates increase margins.
With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues rose from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years. Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
Source: WFC, TV, WSJ
From The TradersCommunity Research Desk