Wells Fargo misses interest income estimates as deposit costs rise, stocks fall

Written by Nour Zeinab Hussein, Saeed Azhar and Monia Saini

(Reuters) – Wells Fargo Inc’s second-quarter profit fell and the bank missed analysts’ estimates for interest income due to higher deposit costs amid intense competition for customer money, sending its shares down more than 6 percent.

Net interest income — or the difference between what the bank earns on loans and what it pays out on deposits — fell 9% to $11.92 billion. Analysts on average had expected $12.12 billion, according to data from the London Stock Exchange Group.

The U.S. Department of Homeland Security said Friday that net investment income could fall by 7% to 9% this year.

“At this point in the year, we expect that to be in the upper half of that range, or roughly 8% to 9%,” Wells Fargo Chief Financial Officer Michael Santomassimo told reporters on an earnings call.

Citigroup analyst Keith Horowitz said in a note that the rise in net interest income was part of investors’ “bullish thesis” at the start of the quarter, so the new guidance provided by management for NII is likely to weigh on the stock.

The bank said average deposit costs jumped to 1.84% in the second quarter, from 1.13% a year earlier.

Banks are having to pay more to retain customers looking for higher returns while also dealing with the implications of higher interest rates for longer as borrowers hesitate to take out new loans.

“Price expectations continue to change… We hope to see how things will evolve and how they translate into action,” Santomassimo said.

Net income fell to $4.91 billion in the three months ended June 30, compared with $4.94 billion a year earlier.

The bank also added that it expects non-interest expenses in 2024 to be about $54 billion, up from its previous forecast of about $52.6 billion.

However, Wells Fargo’s second-quarter earnings beat expectations, helped by higher fees from investment banking.

On a per-share basis, the company reported earnings of $1.33, compared to LSEG’s estimate of $1.29.

The fourth-largest U.S. bank said net write-offs — or the amount of loans unlikely to be recovered — for commercial real estate were $271 million, or 74 basis points of average loans, driven mostly by the office segment.

The bank has been reducing its exposure to commercial real estate over the past year as the sector’s problems have worsened. While the bank has increased provisions to cover potential defaults, particularly in office space, executives said the commercial real estate portfolio remains manageable.

Enhance investment banking services

Investment banking was a bright spot for the bank in the second quarter. Rival JPMorgan Chase reported a 25% jump in second-quarter profit on Friday, helped in part by higher investment banking fees.

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Citigroup’s profits rose on a 60% jump in investment banking revenue in the second quarter.

“We continued to see growth in our fee-based revenue, offsetting the expected decline in net interest income,” Wells Fargo CEO Charlie Scharf said in a statement.

Investment banking revenues rose 38% to $430 million for the bank.

Under Scharf’s leadership, Wells Fargo strengthened its investment and trading activities, hiring some top executives from its competitors.

Dealogic data showed that global mergers and acquisitions reached $1.6 trillion in the first half of the year, up 20% from a year earlier. Capital market volumes rose 10% during the same period.

However, Wells Fargo is still constrained by a $1.95 trillion asset cap, preventing it from growing until regulators decide it has resolved the problems caused by the fake-accounts scandal.

The bank still has eight open consent orders after the U.S. Office of the Comptroller of the Currency ended a 2016 sanction in February.

(Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Saeed Azhar in New York; Editing by Lannan Nguyen and Sriraj Kalluvilla)