What to Expect from Wells Fargo Earnings as Net Interest Margin Contracts

Wells Fargo report second quarter earnings before the bell Friday along with three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C) and State Street (SST). Wall Street expects Wells Fargo earnings will show an overall revenue decline for the bank. A rise in net interest income to be hurt by weakness in lower loan origination and softer trading gains. Wells Fargo continues to be hurt by a variety of legacy regulatory and legal settlements.


Wells Fargo Earnings Preview

Q2 2023 earnings release at 7 a.m. ET; conference call at 12 p.m. ET

  • Projected EPS: $1.16 a share (vs. $1.23 in Q1)
  • Projected revenue: $20.1 billion, up by 16.9% YoY, but down 3.1% QoQ
  • Projected return on equity (ROE) ratio: Expected to be around 11% (NB: JPMorgan ROE is expected to be above 16% in Q2.)
  • Projected core tier 1 (CET1) ratio is expected around 10.8% (Above capital requirement of 9.2%, note it fell to 8.2% in the Fed Stress Test adverse scenario)


Following the Fed stress tests Wells Fargo made the following statement regards dividends:

The Company expects to increase its third quarter 2023 common stock dividend to $0.35 per share from $0.30 per share, subject to approval by the Company’s Board of Directors at its regularly scheduled meeting in July. Additionally, over the four-quarter period beginning third quarter 2023 through second quarter 2024, the Company has capacity to repurchase common stock, which will be routinely assessed as part of the Company’s internal capital adequacy framework that considers current market conditions, potential changes to regulatory capital requirements, and other risk factors.

“This year’s CCAR stress test affirmed that Wells Fargo remains in a strong capital position, reflecting the value of our franchise and benefits of our operating model,” said CEO Charlie Scharf. “This capital strength allows us to serve our customers’ financial needs, while continuing to prudently return excess capital to our shareholders.”

Exposure to high interest rates

In comparison to the money center banks with high exposure to investment banking Wells Fargo’s exposure to higher interest rates is quite significant. 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.

For 2022,

  • Wells Fargo’s net interest income $44.9 billion, 61% of total revenues,
  • JPMorgan (JPM) generates 51% of revenue from NII,
  • Goldman Sachs (GS) generates 17% of revenue from NII.

Rising interest rates benefit the bank more than its competitors. Wells Fargo’s NII increased by 20% YoY in 2022, however the bank’s total revenues decreased by 6% YoY. This goes back to the structural weaknesses we continue to talk about. Higher interest rates have not enough to offset weakness in other areas. Lower loan origination led to lower commissions, and trading gains were also softer, explaining the bank’s overall revenue decline. Analysts expect more of the same going forward.

Another impact will be that the net interest margin is expected to contract from 3.20% in Q1 2023 to 3.06% in the second quarter. This happens due to higher cost of deposits, which usually have a large lag to rising rates, due to deposit betas being lower than asset sensitivity to higher rates.

Cautions Remains

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.

Wells Fargo penalties:

  • $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

Aside from the fines Wells Fargo’s operating performance has been constrained by the Fed’s $2 billion asset cap. Incidentally the bank has expected since 2018 to be resolved in a relatively short period of time, but they keep having scandals. All this puts severe limitations on the bank’s ability to grow its business. This has resulted in Wells Fargo not being able to reduce its cost-to-income ratio in recent years, with the increased costs from regulation. This has not been offset by higher recurring revenues.

Loan Loss Provisions

Loan-loss provisions are expected to just under $1.5 billion, an increase of 23% Q/Q and more than double compared to Q2 2022. This represents a cost of risk ratio of 60 basis points (bps), which is considered an acceptable level in today’s credit squeezed and volatile environment. WFC net charge-offs are expected to be around $700 million, leading to total credit costs of about $2.2 billion in the quarter (vs. $1.8 billion in Q1). Another headwind for earnings growth.

Wells Fargo Last Quarter Earnings

Source: WFC, TV, WSJ

From The TradersCommunity Research Desk