Wells Fargo's earnings beat estimates as shares sway on interest expectations

Written by Saeed Azhar, Noor Zainab Hussain and Manya Saini

(Reuters) – Wells Fargo's profit fell 7% in the first quarter, beating analysts' expectations, as it paid more to retain customer deposits while demand from borrowers fell.

Its stock fell 2.1% after swinging between gains and losses. The volatility reflects uncertainty among investors about how much money banks will make from interest payments in the coming months.

Wells Fargo's net interest income (NII) — or the difference between what it earns on loans and what it pays out on deposits — could fall 7% to 9% this year, she said. National Insurance fell 8% to $12.23 billion in the first quarter.

“It's certainly difficult these days to predict NII, given all the volatility we've seen across a lot of different data points, as well as some of the uncertainty that's out there in terms of how our clients will behave.” Finance Minister Michael Santomassimo told reporters by phone.

Guidance is “conservative,” and Wells Fargo could see more income as interest rates remain high for longer, CFRA analyst Alexander Yocum wrote in a note. He upgraded the stock to a buy rating from hold.

Wells Fargo's adjusted earnings of $1.26 per share came in ahead of analyst estimates of $1.11, according to LSEG data, helped by corporate and investment banking revenue, which rose nearly 5%.

Ibrahim Poonawalla, an analyst at Bank of America, reiterated his buy rating on the stock, saying the results and outlook support a “constructive view.”

The change in US interest rate expectations is an important factor that will drive future bank earnings. US consumer prices rose more than expected in March, leading financial markets to expect the Federal Reserve to delay interest rate cuts until September.

Higher interest rates boosted lenders' profits as they brought in more money from interest payments, but this interest tapered off in the first quarter of 2024.

The story continues

CFO Santomassimo told analysts that the National Insurance Institute's forecast is based on expectations of three interest rate cuts this year.

Higher interest rates have also made it more expensive for banks, causing them to pay more to maintain deposits from customers seeking higher returns.

Tight monetary policy can also hamper borrower demand and weaken economic activity, including deal-making on Wall Street.

Wells Fargo also paid $284 million to the Federal Deposit Insurance Corp. fund, which was drained last year after three regional lenders failed.

Average loans fell by $20.6 billion, or 2%, year over year, driven by declines in most loan categories, the bank said.

Rival Citigroup posted lower profits as it spent more on severance payments and set aside money to replenish the government's deposit insurance fund, while JPMorgan Chase's 2024 NII forecast fell short of analysts' expectations.

Wells Fargo reduced its allowance for credit losses on office loans by $76 million to $2.4 billion in the first quarter.

“Our portfolio remains very healthy,” Santomassimo said. He added that the bank was not overly concerned about vulnerability in multifamily buildings and did not have significant exposure to rent-stabilized properties.

A surprise fourth-quarter loss at New York Community Bank raised industry concerns about weakness in commercial real estate that has expanded beyond offices into multifamily properties with more than five units.

Facilitate auditing

Credit card lending was a bright spot, while auto lending suffered a sharp 23% decline in the quarter.

The bank operates under an asset ceiling of $1.95 trillion, which prevents it from growing until regulators see that it has fixed problems resulting from the fake accounts scandal. While investors speculated that growth limits might be lifted, executives continued to say that the decision was in the hands of regulators.

The lender still has eight approval orders open after the U.S. Office of the Comptroller of the Currency (OCC) ended the 2016 penalty in February.

“We reached an important milestone in the first quarter when the OCC announced the termination of its 2016 consent order related to sales practice misconduct,” Charlie Scharf, the company's CEO, said in a statement.

“The remaining risk and control work remains our top priority and we will not be satisfied until all work is completed,” he added.

Scharf became CEO in 2019, the fourth person to lead Wells Fargo since the scandal first came to light. He has worked to turn the lender around, cut costs and exit the business after racking up billions of dollars in lawsuits and regulatory fines.

The bank said non-interest expenses overall rose 5% in the quarter, driven in part by the cost of replenishing the government's deposit insurance fund.

Wells Fargo stock is up about 14.8% so far this year, compared with a 7.1% gain in the S&P 500 Bank Index, which tracks major lenders.

(Reporting by Noor Zainab Hossain and Manya Saini in Bengaluru and Saeed Azhar in New York; Editing by Lanannah Nguyen, Sriraj Kalluvilla and Nick Zieminski)