Wells Fargo (WFC, Financial), along with JPMorgan Chase (JPM, Financial) and Citigroup (C, Financial), has initiated the Q1 earnings season for the banking sector. Despite surpassing earnings expectations, the overall results presented a varied performance. The initial boost from higher interest rates has dwindled in Q1, as loan demand decreased and funding costs went up.
The key points from Wells Fargo's Q1 earnings include:
- An 8% year-over-year decline in net interest income to $12.2 billion, attributed to slowing loan demand and rising funding costs.
- A more than 2% year-over-year drop in average loans to $928.1 million, with auto loans plunging 23% due to the increased cost of car ownership.
- While higher mortgage rates affected home lending volume, a year-over-year increase in mortgage banking income from those rates kept home lending earnings stable at $864 million.
- Despite higher rates and economic challenges impacting loan demand, WFC saw a decrease in net charge-offs by 8% quarter-over-quarter to $1.16 billion, and a 2% reduction in non-performing assets, mainly in commercial real estate.
- Mixed performance in Corporate and Investment Banking, with a 2% year-over-year increase in total revenue to $4.98 billion. Investment banking revenue soared by 69% to $474 million, thanks to a reviving IPO market, while FICC trading revenue grew by 6%.
- A 13% decline in treasury management and payments revenue to $686 million, as higher rates increased deposit costs.
- Regulatory challenges persist for WFC due to the 2016 fake accounts scandal, with an asset cap of $1.95 trillion in place until all issues are resolved. However, the OCC has terminated one of the consent orders issued in 2016.
The primary takeaway is Wells Fargo's mediocre performance in Q1, with high interest rates impacting loan demand, net interest income, and a 2.4% year-over-year drop in EPS. Following a hotter-than-expected CPI report, expectations for the upcoming quarters remain cautious, with WFC reiterating its FY24 guidance for a 7-9% decrease in net interest income.
