Wells Fargo profit beats forecasts as provisions shrink, shares rise

WELLS Fargo’s profit beat analysts’ expectations in the third quarter, helped by resilience in wealth management and lower provisions for credit losses, which sent its shares up 3.5 per cent before the bell on Friday (Oct 11).

The bank, however, forecast a bigger-than-expected 9 per cent drop in 2024 interest income on Friday following the US Federal Reserve’s jumbo-sized rate cut in September.

This compares with Wall Street expectations of an 8.4 per cent decline.

The fourth-largest US lender reported third-quarter earnings per share of US$1.52, compared with expectations of US$1.28, according to data from LSEG.

Wells Fargo’s net interest income – or the difference between what it earns on loans and pays out for deposits – dropped 11 per cent to US$11.69 billion in the quarter.

Analysts on average had predicted US$11.87 billion, according to estimates compiled by LSEG.

“Our risk and control work remains our top priority,” said chief executive officer Charlie Scharf. “Credit performance was consistent with our expectations, commercial loan demand remained tepid, we saw growth in deposit balances in all of our businesses.”

Banks’ interest income, which had benefited in recent years as the Fed raised interest rates, is expected to keep declining for the rest of 2024.

The US central bank last month lowered its benchmark policy rate for the first time since 2020, cutting it by 50 basis points. Policymakers have projected another half of a percentage point reduction by the end of this year.

The rate cut was followed by top banks lowering prime lending rates, which will likely shrink their interest income. Banks have also tightened lending standards this year.

Wells Fargo’s revenue declined 2 per cent to US$20.37 billion in the third quarter.

Average loans came in at US$910.3 billion versus US$943.2 billion a year earlier.

Loan demand has been subdued as higher interest rates deterred commercial and consumer borrowers. At the same time, banks have had to compete for deposits by paying clients more.

Wells Fargo set aside US$1.07 billion in provisions to cover souring loans. That compared with US$1.20 billion a year earlier.

JPMorgan Chase’s profit dropped in the third quarter as a bigger provision for potential loan defaults offset gains from investment banking, the bank said on Friday.

Executives at top lenders have said that US consumers remain resilient despite pockets of stress and higher loan delinquencies among lower-income households.

Wells Fargo is also reportedly doubling down on efforts to lift a US$1.95 trillion asset cap imposed by the Federal Reserve that prevents the bank from growing until regulators deem it has fixed problems dating back to the 2016 fake accounts scandal.

In September, a US banking regulator found its safeguards against money laundering and other illegal transactions were too lax and restricted its ability to expand in risky businesses.

The asset cap curtails Wells Fargo’s ability to take in more deposits and expand its trading business, two potential growth areas for the bank, CEO Scharf said earlier this year.

It still has eight regulatory punishments, called consent orders, that it is working to address. REUTERS