Wells Fargo's earnings shrink more than 7% due to lower interest income

Written by Noor Zainab Hussain, Saeed Azhar and Manya Saini

(Reuters) – Wells Fargo's profits fell 7% in the first quarter as paying customers for deposits became more expensive and demand from borrowers declined, the bank reported on Friday.

However, adjusted profit 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 about 5%.

Shares fell 1.6% in early trading.

The bank's net interest income (NII) – the difference between what it earns on loans and what it pays on deposits – fell 8% to $12.23 billion.

The bank's interest income eroded as it paid more to hold the deposits of customers who were looking for higher returns, while loans declined.

“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.

The bank confirmed on Friday that National Insurance may fall by 7% to 9% this year.

“People expected net interest income to be better and to trend higher,” said Stephen Biggar, a banking analyst at Argus Research.

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.

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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.

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 reported lower profits as it spent more on severance payments and set aside money to replenish the government's deposit insurance fund, while JPMorgan Chase forecast national net income for 2024 to be lower than 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.

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

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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.

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.

Overall, non-interest expenses rose 5% in the quarter, driven in part by higher FDIC ratings, the bank said.

Wells Fargo stock is up about 15.2% so far this year, compared with a 10.4% gain in the S&P 500 Bank Index, which tracks large banks.

(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)

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