Wells Fargo beats profit estimates, but net interest income, revenue fall short

Oct 13 — Wells Fargo beat Wall Street estimates for third-quarter profit on Tuesday, but lower-than-expected net interest income and revenue sent ​the fourth-largest US lender's shares lower.

Big bank earnings have started off mixed after a volatile quarter, roiled by the conflict in Iran, higher oil prices and a global bond-market selloff. JPMorgan Chase fell short of quarterly profit estimates for ‌the first time in nearly three years while other large institutions saw choppy activity in their fixed income, currency and commodities divisions.

Wells Fargo's earnings beat was driven by ⁠robust growth in loans, but net interest income — the difference ​between what a lender earns on loans and pays out ⁠on deposits — fell short of expectations. That metric was hurt by lower interest rates on floating-rate assets, higher deposit costs and a ‌decline in non interest-bearing deposits.

Executives said ‌businesses were pressured by the more challenging market environment that emerged in the last few weeks of ⁠September and the sharp move upward in interest rates.

"Inflation and higher interest rates continue ⁠to be headwinds, and the longer they persist, the more pressure they can place on both consumers and commercial clients," CEO Charlie Scharf told analysts.

"While markets have been strong, an unexpected or significant movement could filter through the broader economy."

The bank reported a profit of $1.87 per share, beating analysts' average expectations of $1.85, according to data compiled by LSEG. Net interest income rose 5% to $12.52 billion, short of expectations of $12.63 billion.

Revenue came in at $21.87 billion, short of estimates for $22.31 billion.

Shares were last ‌down about 1.3%.

MARKETS PRESSURE

CFO Mike Santomassimo said he expects fourth-quarter net interest income to grow, ​boosted by loan and deposit growth, while also benefiting from higher interest rates.

However, some of those gains could be offset by the markets business, where higher borrowing costs are a drag on net interest income. That unit, which provides financing and risk management services to institutional investors, was hurt by slowed fixed income, currencies, and commodities trading. Revenue was down 1% year-over-year and off 17% from the previous quarter.

Investment banking activity across Wall Street was more subdued due to market uncertainty and the surge in higher borrowing costs that spurred companies to take a wait-and-see approach to fundraising and investment. Wells has ​invested heavily in its investment banking and markets businesses, hiring senior bankers and spending more on client financing, trading and other capital-markets activities.

Wells Fargo raked in ‌investment banking revenue ‌of $611 million in the quarter, ⁠up 10% from a year earlier. However, it was down 3% sequentially, mirroring a trend across peers.

CONSUMER SPENDING RESILIENT

Wells, which relies on consumer banking and lending for nearly half of its income, has leaned on credit cards and auto loans to grow its consumer loan book, where spending trends are healthier due to the resilience in the US economy.

Average consumer loan balances grew 4% to about $342 billion, ‌while commercial banking loans climbed 10% ​to $240.5 billion.

"We're not seeing any change in behavior across either borrowers or depositors ‌that would lead us to believe ⁠something's changing in the underlying ​trends that we've seen now," Santomassimo told reporters on a post-earnings call.

(Reporting by Utkarsh Shetti in Bengaluru and Nivedita Balu; Editing by Sriraj Kalluvila ​and David Gaffen)

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