Wells Fargo & Co. delivered a stronger-than-expected earnings performance for the third quarter of 2024, despite facing challenges from declining net interest income. The San Francisco-based lender reported adjusted earnings per share of $1.52, exceeding analysts' predictions of $1.28, as its profit margins were buoyed by diversified revenue streams and lower-than-expected provisions for credit losses. Following the earnings announcement, Wells Fargo's shares jumped over 5% in morning trading.
The bank's revenue came in slightly below expectations at $20.37 billion, just shy of the anticipated $20.42 billion. However, the revenue miss was overshadowed by robust performance in other areas. CEO Charles Scharf pointed out the bank's evolving earnings profile, saying, "Our revenue sources are more diverse, and fee-based revenue grew 16% during the first nine months of the year, largely offsetting net interest income headwinds."
Wells Fargo's net interest income (NII) fell 11% to $11.69 billion, down from $13.14 billion a year earlier, missing FactSet's estimate of $11.9 billion. The decline was primarily attributed to increased funding costs as customers moved their deposits into higher-yielding products. Despite this setback, CFO Michael Santomassimo remained optimistic about future prospects, stating that lower rates on deposits could actually benefit the bank's interest income in the long run.
Santomassimo explained that as the Federal Reserve continues to lower interest rates, Wells Fargo anticipates a favorable impact on its net interest income. "As we continue to see rate cuts, those trends will continue, and that'll be a net positive for NII as we look forward," he said during a media call. The bank expects its fourth-quarter NII to stabilize at levels similar to the third quarter, marking what it views as a turning point in its interest income performance.
Net income for Wells Fargo fell to $5.11 billion, or $1.42 per share, compared to $5.77 billion, or $1.48 per share, in the same quarter last year. The decline included losses of $447 million on debt securities. Even with these headwinds, the bank's earnings were supported by strategic investments and a focus on fee-based businesses, which have diversified its revenue streams.
The bank's credit loss provisions also came in lower than expected, with $1.07 billion set aside in the third quarter compared to $1.20 billion a year earlier. This decrease in provisions reflects a more favorable credit environment than anticipated, though Scharf cautioned that risks remain, particularly in commercial real estate. "Office space continues to be an area of concern in the commercial real estate sector," he noted, suggesting that additional losses could occur in the future.
Wells Fargo also continued its aggressive stock repurchase strategy, buying back $3.5 billion of common stock in the third quarter, bringing its total for the year to over $15 billion-a 60% increase from the previous year. This move highlights the bank's confidence in its financial stability despite the current economic uncertainties and the looming asset cap imposed by regulators.
The Federal Reserve's recent rate cuts have posed both challenges and opportunities for Wells Fargo. While lower rates have pressured the bank's net interest margins, they have also opened the door for more competitive lending conditions. Santomassimo noted that rates are now decreasing on certificates of deposit and other interest-sensitive products, which could lead to reduced payout costs and improved profit margins in the coming quarters.
Scharf addressed the ongoing regulatory scrutiny the bank faces, particularly the $1.95 trillion asset cap that has restricted Wells Fargo's growth since the fallout from its 2016 fake accounts scandal. He emphasized that lifting the cap remains a priority as the bank continues to strengthen its compliance and risk management systems. "Our risk and control work remains our top priority," Scharf stated, underlining the bank's commitment to resolving its outstanding consent orders with U.S. regulators.
Despite the bank's ongoing efforts to repair its reputation and resolve compliance issues, it continues to face eight regulatory actions that limit its ability to expand into new markets and increase its asset base. Nonetheless, Wells Fargo has shown resilience through strategic shifts in its business model and a renewed focus on areas that offer sustainable revenue growth.
