Wells Fargo & Co (NYSE:WFC) earnings managed to meet Wall Street expectations, but WFC stock slumped on the realization that growth is going to be a slog for some time.
The long period of ultra-low interest rates has been an albatross for bank profitability for years now, as it narrows the margin between what a bank pays to borrow and charges to loan. Rising costs in the most recent quarter, a decline in the bottom line and charge-offs for bad debt in the energy sector all conspired to make it a downbeat quarter for Wells Fargo.
True, lower long-term rates helped WFC’s mortgage loan business, but for the most part they were a drag. Morningstar analysts note that average deposits grew only 1% during the quarter, “which is somewhat surprising given Wells’ typical ability to gather low-cost deposits.” Additionally, deposit costs rose.
A Blah Quarter for WFC
For the second quarter, Wells Fargo’s net income applicable to common shareholders fell to $5.2 billion from $5.4 billion a year earlier. On an earnings-per-share basis, profit dropped to $1.01 from $1.03 in last year’s second quarter, which matched analysts’ average estimate, according to Thomson Reuters.
Revenue rose 4% to $22.2 billion to match Street estimates.
Low interest rates in a slow-growth economy have forced banks to depend on cost cutting to burnish their bottom lines. In that regard, WFC had a disappointing quarter. Costs increased 3% to $12.87 billion from $12.47 billion year-over-year.
Other less-than-spectacular results taking a bite out of WFC include a multi-year low in the bank’s return on equity, a decline in profits from its community banking division and a drop in earnings from wholesale banking.
It wasn’t a disastrous three-month period by any means, but Wells Fargo failed to give investors any compelling reason to own WFC stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
