Wells Fargo Gets Boost from Higher Rates but Loan Growth Stagnates -- 4th Update
July 14 2017 - 3:04PM
Dow Jones News
By Peter Rudegeair
Wells Fargo & Co. reaped the benefits of higher interest
rates in the second quarter, which helped push profit at the
nation's third-largest bank up by 4.5%.
The San Francisco-based bank's shares fell 2% in midday trading,
however, as stagnant lending, weaker revenue in areas like mortgage
banking and higher costs overshadowed progress on the bottom
line.
Shares in Wells Fargo and other big banks had been on a tear
since the U.S. presidential election as investors wagered that the
Trump administration would take a more cordial approach to
regulating Wall Street and fostering growth. But with little change
to either the economic outlook and policy toward banks, it is
unclear when banks' earnings potential will catch up to their
higher valuations.
"Much of [the run-up in stocks] was probably aggressive or not
fully warranted," said John Shrewsberry, Wells Fargo's finance
chief, in an interview. "The realized outcome doesn't look any
different than the realized outcome a year ago. So I think markets
have to grapple with what does that actually mean."
Wells Fargo reported a profit of $5.81 billion, or $1.07 a
share. That compares with $5.56 billion, or $1.01 a share, in the
same period of 2016. Analysts polled by Thomson Reuters had
expected earnings of $1.01 a share.
The bank's results included a $186 million tax benefit during
the second quarter, most of which was related to a deal it reached
in June to sell its commercial insurance business. That boosted
Wells Fargo's per-share earnings by 4 cents. Excluding this, the
company's earnings would have come in at $1.03.
Net interest income at the bank rose 6.4% to $12.48 billion from
the same period last year. The rates Wells Fargo charges customers
to borrow on credit cards, home equity lines of credit and other
loan types vary along with the Federal Reserve's target, so the
central bank's policy moves in recent months have directly improved
banks' lending income.
The bank's net interest margin, a measure of how profitably it
can lend out its customers' deposits, rose to 2.9% from 2.86% last
June, and its return on equity rose to 11.95% from 11.7%. The bank
said it exercised discipline in repricing deposits, which helped
them capture more of an increase in loan yields.
The overall size of Wells Fargo's loan book stalled at $957
billion. During the quarter, the bank backed off making certain car
loans and commercial real estate loans due to higher risk in those
segments, executives said on a conference call with analysts.
Wells Fargo's income from fees fell 7% to $9.69 billion, with
several of its businesses facing challenges in the quarter.
Mortgage-banking fee income fell 19% due in part to tougher
competition, and net gains on the bank's trading activities fell
46% due in part to trading losses.
The bank, led by Chief Executive Timothy Sloan, had been one of
the most consistent big banks at growing earnings and revenue.
Shares have underperformed those of other banks after Wells Fargo
last year agreed to a $185 million settlement with two regulators
and a city official over opening as many as 2.1 million accounts
with fictitious or unauthorized information. It also continues to
face a spate of state and federal investigations that the bank has
said it is cooperating with.
About $110 million in additional charges related to remedying
Wells Fargo's operations following the sales-practice scandal
contributed to a 5.2% increase in expenses, which totaled $13.54
billion in the quarter. Expenses as a share of revenue in the
second quarter were 61.1%, slightly above the new target of 60% to
61% set at an investor presentation in May. That is also higher
than the two-year target the bank set last year of 55% to 59%.
"There's no reason why they can't manage their expenses better,"
said John Hadwen, a Toronto-based portfolio manager at CI
Investments Inc. that owns about $315 million in Wells Fargo
stock."The market believes there's a lot more they can do there,
and we're becoming impatient."
In May, the bank announced an initiative to cut an additional $2
billion in costs by the end of 2018. Executives on Friday said they
are making progress on that plan.
"Operating at this level [of expenses] is just not acceptable,"
said Mr. Sloan on a conference call with analysts.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
July 14, 2017 14:49 ET (18:49 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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