Wells Fargo & Co. experienced a significant decline in its stock price on Friday after reporting second-quarter results that highlighted a sharp decrease in net interest income (NII) due to rising deposit costs. The San Francisco-based bank's shares dropped more than 5% in premarket trading, reflecting investor disappointment despite the company's overall profit beating Wall Street expectations.
Wells Fargo's NII, which represents the difference between what the bank earns on loans and what it pays out for deposits, fell 9% to $11.92 billion, missing analysts' average estimate of $12.12 billion according to LSEG data. This decline in NII has prompted the bank to revise its full-year guidance, with expectations now pointing to a 7% to 9% drop, leaning towards the upper end of that range.
"At this point in the year, we expect that to be in the upper half of that range, or approximately down 8% to 9%," Wells Fargo's Chief Financial Officer Michael Santomassimo stated during an earnings call. The higher-than-anticipated deposit costs were a significant factor in this revision, as banks are increasingly paying more to retain customers who are seeking better yields amidst a landscape of high interest rates.
The bank's average deposit costs surged to 1.84% in the second quarter, up from 1.13% a year earlier, underscoring the competitive pressure for customer deposits. As a result, Citigroup analyst Keith Horowitz noted that the new NII guidance is likely to pressure Wells Fargo's stock further.
Despite these challenges, Wells Fargo reported net income of $4.91 billion, or $1.33 per share, exceeding LSEG's earnings estimate of $1.29 per share. This performance was bolstered by a notable increase in investment banking fees, which surged 38% to $430 million. "We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income," said Wells Fargo CEO Charlie Scharf.
Investment banking emerged as a bright spot for Wells Fargo in the second quarter, mirroring trends seen at other major banks. Rival JPMorgan Chase reported a 25% jump in second-quarter profit, driven partly by rising investment banking fees. Similarly, Citigroup saw a 60% surge in investment banking revenue during the same period.
However, Wells Fargo's net interest income shortfall reflects broader industry challenges. The bank's net charge-offs for commercial real estate (CRE) loans, particularly in the office segment, amounted to $271 million. This highlights ongoing difficulties in the CRE sector, although executives emphasized that their CRE portfolios remain manageable despite the increased provisions for potential defaults.
Wells Fargo also faces long-standing regulatory constraints. The bank is still operating under a $1.95 trillion asset cap imposed by regulators following a fake accounts scandal. This cap restricts the bank's ability to grow until it addresses regulatory concerns. As of now, Wells Fargo still has eight open consent orders, despite the U.S. Office of the Comptroller of the Currency terminating a 2016 punishment in February.
The bank's overall revenue for the quarter rose to $20.69 billion, surpassing the $20.29 billion expected by analysts. However, the decline in net interest income and rising costs continue to pose challenges. Wells Fargo set aside $1.24 billion as provisions for credit losses, reflecting cautious optimism amidst a modest decrease in the allowance for such losses.
In response to the earnings report, Wells Fargo's stock fell nearly 7% on Friday, even as the bank remains up more than 22% for the year, outperforming the S&P 500. The bank's repurchase of over $12 billion of common stock during the first half of 2024 and its planned 14% increase in the third-quarter dividend indicate confidence in its long-term strategy.
As Wells Fargo looks ahead, the investments in its advisory, trading, and investment banking activities are expected to play a crucial role in mitigating the impact of declining net interest income. The bank's performance in these areas, alongside its strategic efforts to address regulatory constraints, will be critical in navigating the challenging economic landscape.
