Wells Fargo earnings beat estimates as rising interest rates boost

Wells Fargo earnings beat estimates as rising interest rates boost earnings

Apr 14 (Portal) – Wells Fargo & Co (WFC.N) earnings on Friday beat expectations for the first quarter as the company earned more on higher interest rates, despite executives forecasting tighter monetary policy would dampen economic activity .

The bank also reported a $643 million increase in its allowance for loan losses, including on commercial real estate, credit card and auto loans.

Analysts have warned of further weakness in the commercial real estate (CRE) market as offices in major cities are emptied by widespread remote work. Wells Fargo executives detailed the bank’s commitment to CRE during a conference call with analysts.

“There are pockets of risk, such as commercial office properties, that will probably affect the institutes differently,” said CEO Charlie Scharf. “We proactively manage our own risks.”

The company’s outstanding commercial real estate loans at the end of March were $154.7 billion, or 16% of total loans, including $35.7 billion of office loans.

The office market continues to show signs of weakness due to lower demand, higher financing costs and difficult capital market conditions, Chief Financial Officer Mike Santomassimo said.

While significant losses have yet to materialize, “we expect more stress over time,” he said.

Shares of the bank rose 0.4% on Friday afternoon. They were up more than 4% in premarket trading after results beat expectations.

ECONOMIC OUTLOOK

While rate hikes in recent quarters have helped support US lenders’ interest income, the gains have come alongside mounting worries about the economy as the Federal Reserve keeps interest rates “high for longer”.

“Given the rate of rate hikes, we expect some slowdown in the economy – but so far it has been very strong. You can also see that on the job market,” said Santomassimo.

The bank committed $1.21 billion to cover potential loan losses in the quarter, compared to a commitment of $787 million a year ago.

Banks are piling up cash for rainy days as fears of an economic slowdown mount on the back of aggressive Fed rate hikes as well as the recent banking sector turmoil fueled by the collapse of two mid-tier banks.

The collapses of Silicon Valley Bank and Signature Bank last month caused bank stocks to collapse as investors worried about broader weaknesses in the industry.

Wells Fargo contributed $5 billion as part of a group of large U.S. banks that injected a total of $30 billion in deposits into First Republic Bank (FRC.N) in March.

“We are glad to have been in a strong position to support the US financial system during the recent events that have impacted the banking industry. Regional and community banks are an important part of our financial system,” Scharf said in a statement.

Deposits at Wells Fargo fell 2% to $1.36 trillion at the end of March, compared to $1.38 trillion at the end of last year.

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INCREASE PRICES

Net interest income rose 45% from the year-ago quarter to $13.34 billion.

The bank earned $1.23 per share for the quarter ended March 31, excluding one-time items. That compares to analysts’ average estimate of $1.13 per share, according to data from Refinitiv IBES.

Higher interest rates also supported JPMorgan Chase & Co (JPM.N) earnings in the first quarter, and the largest US lender remained resilient during the banking crisis.

“Both Wells Fargo and JP Morgan delivered very, very solid results, beating expected earnings. Deposits went down, but these big banks really have been so swamped with deposits in recent years that they didn’t know how to put the money to work,” said Opimas CEO Octavio Marenzi.

“The only part of the business that looked weak was investment banking,” he added.

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Average loans in the bank’s commercial banking arm increased 15%, while commercial loans grew about 7% year-over-year.

Wells Fargo is also still working to stem the fallout from a scandal surrounding its sales practices that led to hefty fines and a Fed-imposed asset ceiling.

Overall, noninterest expense decreased to $13.68 billion from $13.85 billion a year earlier, primarily due to lower operating losses.

In the fourth quarter of 2022, the bank had posted $3.3 billion in operating losses related to lawsuits, customer recovery and regulatory matters related to the scandal.

In 2020, Scharf said he wants to reduce costs by $10 billion over several years.

Wells Fargo’s total revenue rose 17% to $20.73 billion in the first quarter.

Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Saeed Azhar in New York; Edited by Sriraj Kalluvila

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Mana Saini

Manya Saini reports on prominent US publicly traded financial companies, including Wall Street’s largest banks, card companies, wealth managers and fintechs. Also covers IPOs on US exchanges, as well as news and regulatory developments in the cryptocurrency industry. Contact: 9958867986