Wells Fargo Warns of Significant Net Interest Income Fall, Books Another $2.9 Billion in Charges

Wells Fargo reported better than expected fourth quarter earnings before the bell Friday. Earnings per share were $1.29, adjusted vs. $1.17 expected and revenue was $20.48 billion vs. $20.30 billion expected. Wells Fargo posted net income for the quarter was $3.45 billion, or 86 cents per share, up slightly from $3.16 billion, or 75 cents a share, a year ago. Wells Fargo shares however fell Friday over 3% after the bank warned that net interest income for 2024 could come in significantly lower year over year.

Somethings never change for the bank. Wells Fargo continues to beset by charges, earnings were lowered by a $1.9 billion charge from a Federal Deposit Insurance Corporation special assessment tied to Silicon Valley Bank and Signature Bank, and a $969 million charge from severance expenses. Excluding these items, the company earned $1.29 a share.

Bankers

WFC reported along with three of the largest U.S. lenders. Bank of America reported along with three of the largest U.S. lenders. There were mixed results at the close; Wells Fargo (WFC 47.40, -1.64, -3.3%), Bank of America (BAC 32.80, -0.35, -1.1%), JPMorgan Chase (JPM 169.05, -1.25, -0.7%) were lower while and Citigroup (C 52.62, +0.54, +1.0%) was higher. BlackRock (BLK) also reported. Notably all exceeded consensus earnings estimates for the December quarter and didn’t sound any real macro alarm bells.

Wells Fargo Q4 23 Earnings

Q4 2023 earnings released at 7 a.m. ET; conference call at 12 p.m. ET

  • Net income of $3.45 billion, or 86 cents per share, up slightly from $3.16 billion, or 75 cents a share, a year ago.
  • Earnings per share: $1.29, adjusted vs. $1.17 expected.
  • Revenue: $20.48 billion vs. $20.30 billion expected.
  • Charge of $1.9 billion from a Federal Deposit Insurance Corporation special assessment tied to the failures of Silicon Valley Bank and Signature Bank, and a $969 million charge from severance expenses.
  • Wells Fargo also recorded a $621 million, or 17 cents per share, tax benefit. Excluding these items, the company earned $1.29 a share, which was better than analysts had predicted.
  • NII $12.77 billion, down 4.9% year over year. The downside mainly driven by lower deposit and loan balances, partially offset by higher interest rate benefits.
  • Net interest margin (on a taxable-equivalent basis) declined year over year to 2.92% from 3.14%.
  • Non-interest income grew 17% to $7.70 billion.
  • Non-interest expenses were $15.78 billion, down 2% year over year.
  • Wells Fargo’s efficiency ratio of 77% was lower than 81% in the year-ago quarter. A decrease in the efficiency ratio indicates an improvement in profitability.
  • As of Dec 31, 2023, total loans of $9438 billion declined 1% on a sequential basis. Total deposits were $1.34 trillion, up marginally on a sequential basis.

Wells Fargo said provisions for credit losses rose 34% to $1.28 billion from $957 million a year ago, as allowances for credit losses rose for credit card and commercial real estate loans. Wells Fargo said that was partially offset by lower allowances for auto loans.

WFC: Stock Market Reaction

  • 47.40 ▼ -1.64 (-3.34%) today
  • 47.40 ▲ +3.18 (+7.19%) past year
  • 47.40 ▼ -0.47 (-0.98%) past 5 years
  • 52wk High $50.77
  • 52wk Low $35.25

Wells Fargo shares are virtually flat this year after rallying more than 19% in 2023.

Net Interest Income Benefit

Wells Fargo said net interest income fell 5% from a year ago to $12.78 billion and warned that the figure could come in 7% to 9% lower for the full year from $52.4 billion in 2023. The decline in net interest income was due to lower deposit and loan balances, but offset slightly by higher interest rates, the bank said.

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.

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.

  • $1.9 billion charge in 2023 from Federal Deposit Insurance Corporation special assessment tied to the failures of Silicon Valley Bank and Signature Bank
  • $969 million in 2023 from severance expenses.
  • $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

Credit Quality Worsens

The provision for credit losses was $1.28 billion compared with $957 million in the prior-year quarter. Net loan charge-offs were $1.25 billion or 0.53% of average loans in the reported quarter, up from $560 million or 0.23% a year ago. Further, non-performing assets jumped 46.5% to $8.44 billion.

Capital Ratio & Profitability Improves

As of Dec 31, 2023, the Tier 1 common equity ratio was 11.4% under the Standardized Approach, up from 10.6% in fourth-quarter 2022.

Return on assets was 0.72%, up from the prior-year quarter’s 0.67%. Return on equity of 7.6% improved from 7.1%.

Outlook

“As we look forward, our business performance remains sensitive to interest rates and the health of the U.S. economy, but we are confident that the actions we are taking will drive stronger returns over the cycle,” said CEO Charlie Scharf in the earnings release. “We are closely monitoring credit and while we see modest deterioration, it remains consistent with our expectations.”

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. Now as we saw with the bank’s warning that spread comes when the Fed lowers rates.

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.

Wells Fargo’s Competitors Q4 Earnings:

Source: WFC, TV, WSJ

From The TradersCommunity Research Desk