Wells Fargo (WFC) earnings were mixed, but results still matched analysts’ estimates, and that should keep WFC on its current trajectory of modest gains for the year.
Although WFC didn’t exactly storm back from a spooky first quarter in which it saw profits decline for the first time in more than four years, it arrested any slide even as some key metrics deteriorated.
For example, revenue missed Wall Street’s forecast, falling to $21.3 billion vs. the $21.7 billion year-over-year estimate. And in the reverse of rival JPMorgan Chase (JPM), WFC said higher costs vs. last year’s quarter hurt the bottom line. In other hits, revenue from mortgage banking slipped 1%, and net interest margin dropped to 2.97% from 3.15% a year earlier.
Declining net interest margin — or the difference between what the bank pays to borrow money vs. what it charges for loans — has been a key area of weakness that has plagued WFC and the rest of the banking industry for years.
The issue is that, with short-term interest rates essentially at zero, it’s tougher and tougher to make money on the spread. And as lower-yielding loans replace higher-yielding loans, net interest income growth slows down.
Indeed, in the most recent quarter, WFC reported a 4% increase in net interest income. That’s an improvement over Q1 or the year-ago period, but it pales in comparison to the sort of growth seen during the refinancing boom.
In other mildly disappointing news, mortgage banking revenue declined 1%. WFC is the largest mortgage lender in the U.S., and mortgage banking revenue accounts for nearly one-fifth of all non-interest income.
What’s more, WFC expects further declines in mortgage-banking revenue as folks take to the sidelines ahead of an expected rate hike from the Federal Reserve.
WFC Quarter Not as Bad as It Looks
If it sounds like WFC earnings were worse than mixed, consider that most important measures improved quarter-to-quarter.
WFC might be struggling with revenue and net interest margin on loans, but it’s still making more of them. The bank made $62 billion in home loans in the quarter vs. $49 billion in the first quarter.
Other metrics indicate that WFC is headed in the right direction, albeit slowly and modestly. Quarter-to-quarter, net interest margin increased to 2.97% from 2.95%. And non-interest expense declined when compared with the first quarter, thanks to lower employee benefits.
True, return on equity slipped a bit quarter-to-quarter and year-over year, but at nearly 13%, it’s remains the highest of any money center bank. WFC’s efficiency ratio also improved.
Besides, as CEO John Stumpf said in a statement, loans, deposits and capital all grew year-over-year.
WFC stock is up a ho-hum (but market-beating) 4.3% for the year-to-date. However, the stock has picked up over the last six months and set an all-time high less than a month ago.
Sure, business is mediocre at best, but that’s enough to drive further — albeit modest — gains this year.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
