Wells Fargo (WFC, Financial) and its banking peers are experiencing mixed effects from higher interest rates. While these rates allow WFC to generate more interest income from its loan portfolio, they also lead customers to seek higher-yielding deposit products. This shift has increased WFC's funding costs, causing net interest income (NII) to drop by 9% year-over-year to $11.9 billion, missing analysts' expectations.
- High interest rates have negatively impacted WFC's home lending business, with revenue dropping 3% year-over-year to $823 million due to home affordability issues limiting mortgage origination activity.
- Despite expectations for the Fed to cut rates following a cooler-than-expected June CPI report, WFC does not foresee a significant shift in the business environment for the rest of 2024, adding to investor disappointment.
- WFC expects FY24 NII to decline by 7-9% year-over-year, likely landing in the upper half of that range.
- In the Consumer Banking and Lending segment (43% of total Q2 revenue), revenue fell by 5% to $9.0 billion due to the shift to higher-yielding deposit products, reducing the deposit base available for lending. Additionally, auto lending was down 25% as consumers avoid big-ticket purchases.
- On a positive note, WFC's Investment Banking and Markets businesses performed well. A more active IPO market boosted Investment Banking revenue by 38% to $430 million, while a strong stock market led to a 41% increase in equities trading revenue, raising total Markets revenue by 16% to $1.8 billion.
- The strong stock market also drove a 6% increase in WFC's Wealth and Investment Management segment, benefiting from higher asset-based fees.
- From a credit quality perspective, WFC remains in good shape as provisions for credit losses declined by $477 million year-over-year to $1.2 billion. However, there are minor issues in the commercial real estate portfolio.
- Total nonperforming assets grew by 5%, or $410 million, due to higher commercial real estate nonaccrual loans. Commercial net loan charge-offs as a percentage of average loans increased to 0.35% from 0.25%.
Overall, Q2 was a mixed bag for WFC. The company managed to beat EPS expectations, but higher interest rates continued to squeeze margins and pressure its home and auto lending businesses.
