Wells Fargo (WFC, Financial) delivered a strong Q3 earnings performance despite high interest rates impacting loan demand and increasing funding costs. Key factors included maintaining flat noninterest expenses year-over-year and reducing provisions for potential credit losses. The bank's solid credit quality was evident as total net loan charge-offs decreased by nearly 15% quarter-over-quarter to $1.11 billion.
WFC's stock has underperformed its banking peers in 2024, which set the stage for its recent outperformance. Excluding recent gains, WFC has risen 17% year-to-date, compared to a 25% increase for JPMorgan Chase (JPM, Financial), with Citigroup (C, Financial) and Bank of America (BAC, Financial) up 23% and 19%, respectively.
However, WFC's overall results and outlook were mixed:
- Net interest income (NII) decreased by 11% to $11.7 billion, slightly missing expectations. Higher funding costs and a shift towards higher-yield deposit products, like promotional savings accounts and CDs, impacted NII.
- Loan activity was sluggish, with average loan balances down by 3% to $32.9 billion. The high interest rate environment dampened the housing market, with home lending revenue increasing only by 2%. Auto lending revenue fell by 24% as consumers avoided big-ticket purchases.
- The Corporate and Investment Banking segment's revenue was flat year-over-year at $4.91 billion. The Investment Banking unit saw a slight revenue dip to $419 million, missing growth expectations despite increased IPO and merger activity.
- Markets revenue increased by 6% year-over-year to $1.75 billion, driven by a 16% rise in FICC trading fees. This offset a 24% year-over-year drop in equities revenue.
- The Wealth and Investment Management segment saw a 5% revenue increase to $3.9 billion, benefiting from strong market performance. However, a rise in interest rates paid to wealth management customers contributed to a 16% year-over-year decrease in net interest income to $842 million.
Overall, Wells Fargo navigated a challenging environment well, but interest-rate headwinds are expected to continue in the near term. The company adjusted its FY24 NII guidance, predicting a 9% drop, compared to the previous 7-9% forecast. Investors are optimistic about potential stronger demand for WFC's lending products next year as interest rates may decrease.
