Wells Fargo Profit Declines in First Quarter, Outlook Uncertain
Volatility in Revenue from Borrowers Affects Wells Fargo’s First Quarter Profit
Wells Fargo, one of the largest banks in the United States, reported a 7% decline in profit for the first quarter. Despite beating analysts’ forecasts, the decline was attributed to increased costs of holding customer deposits and a drop in demand from borrowers.
The bank’s stock initially swung between gains and losses, reflecting investor uncertainty about future interest payments. Wells Fargo’s net interest income (NII), the difference between what the bank earns on loans and pays out for deposits, is expected to decline between 7% and 9% for the year. NII fell 8% to $12.23 billion in the first quarter.
During a call with reporters, Wells Fargo’s finance chief Michael Santomassimo noted the difficulty in forecasting NII due to the volatility in various data points and uncertainties surrounding customer behavior.
However, CFRA analyst Alexander Yokum believes the bank’s guidance is conservative and expects Wells Fargo to bring in more income if interest rates remain higher for a longer period. Yokum upgraded the bank’s stock to a buy rating from hold.
Strong Revenue in Corporate and Investment Banking Helps Boost Wells Fargo’s Profit
Despite the decline in profit, Wells Fargo’s adjusted per-share profit of $1.26 exceeded analysts’ estimates of $1.11, thanks to a 5% increase in revenue from corporate and investment banking.
Analyst Ebrahim Poonawala from Bank of America maintained a buy rating on the stock, stating that the results and outlook support a constructive view.
Implications of Shifting U.S. Interest Rate Outlook on Banks’ Profits
Welcome news for banks in recent years, higher interest rates allowed for increased earnings from interest payments. However, the benefit appears to have faded in the first quarter of 2024.
Wells Fargo’s NII forecast for the year is based on expectations of three rate cuts. The higher interest rates have also resulted in increased costs for banks, pushing them to pay more in order to retain customers seeking higher yields.
Additionally, tighter monetary policy could potentially reduce borrower demand and dampen economic activity, including the level of dealmaking on Wall Street.
Wells Fargo Addresses Regulatory Concerns and Setbacks
Wells Fargo paid $284 million into a Federal Deposit Insurance Corp fund that depleted after three regional lenders failed last year.
The bank’s average loans fell $20.6 billion, a 2% decrease compared to the previous year, primarily driven by declines in most loan categories.
CEO Charlie Scharf highlighted the progress made in resolving regulatory issues, with the U.S. Office of the Comptroller of the Currency terminating a 2016 punishment earlier this year. Although the bank still faces eight open consent orders, Scharf remains committed to ensuring that all necessary risk and control work is completed.
Outlook and Market Performance
Wells Fargo’s stock rose approximately 14.8% year to date, outperforming the S&P 500 Banks Index, which recorded a 7.1% gain for the same period.
Despite uncertainties surrounding the bank’s profitability in the coming quarters, analysts such as Ebrahim Poonawala from Bank of America continue to hold a positive view on Wells Fargo’s outlook.
Overall, although Wells Fargo’s first-quarter result indicates a decline in profit, the bank is actively addressing regulatory concerns and remains focused on improving its performance in the market.
