Why did net interest income decline so sharply despite higher asset yields?

Deposit and funding costs rose faster than asset yields. Average interest-bearing deposit costs increased to 2.46% from 1.43% a year earlier, and customers moved cash into higher-yielding deposit products and alternatives. Lower average loans (down 3% year over year) and lower deposit balances in Consumer Banking and Lending and Wealth and Investment Management further reduced net interest income. Management expects 2024 net interest income to decline roughly 8-9% from the 2023 level of $52.4 billion.

Is the credit quality trend deteriorating, and where is the risk concentrated?

Credit metrics weakened modestly in the quarter. Net charge-offs rose to $1.3 billion from $1.15 billion, and nonperforming assets increased $410 million to $8.7 billion. The increase was concentrated in commercial real estate, particularly office, where CRE nonaccruals rose by $408 million and office nonaccruals rose by $557 million. In consumer lending, the credit card net charge-off rate rose to 4.96% from 4.48%. The allowance for credit losses for loans was stable at $14.8 billion, or 1.61% of loans, which management views as consistent with its expectations.

How much capital is Wells Fargo returning, and is the dividend increase secure?

The company repurchased $6.1 billion of common stock (100.5 million shares) in the second quarter and over $12 billion in the first half of 2024. Management said it expects to raise the third-quarter dividend to $0.40 per share from $0.35, a 14% increase, subject to Board approval at its July meeting. The increase is supported by a CET1 ratio of 11.0%, well above the 8.9% regulatory minimum plus buffers. However, the stress capital buffer is expected to increase to 3.8% from 2.9%, which raises the required capital level and could constrain future buybacks.

What is driving the increase in noninterest income and is it sustainable?

Noninterest income growth came from several sources: higher trading revenue in Markets (equities up 41% year over year), investment banking fees up 70% on broad-based deal activity, higher asset-based advisory fees from improved market valuations, and better venture capital results. Part of the year-over-year increase also reflects a new accounting standard for renewable energy tax credit investments, which moved amortization into income tax expense. Trading and investment banking revenues are market-dependent and can be volatile, so investors should distinguish cyclical gains from recurring fee growth such as asset-based advisory fees.

What do the 2024 expense and operating loss trends imply for the outlook?

Management raised its 2024 noninterest expense guidance to approximately $54.0 billion from about $52.6 billion. The increase reflects higher revenue-related compensation, which management notes is offset by higher fee income, as well as operating losses and customer remediation accruals that have run above expectations in the first half. The first half also included $336 million of FDIC special assessment expense. Management cautioned that outstanding litigation, regulatory, and customer remediation matters could further affect operating losses, so expense outcomes carry continuing uncertainty.

WFC 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed July 12, 2024. Cited figures are marked; the original filing is the authoritative source.

Wells Fargo reported second quarter 2024 net income of $4.9 billion^a, or $1.33 per diluted share, up 11% from $1.20 in the first quarter and up 6% from $1.25 a year earlier.

Total revenue was $20.7 billion^b, roughly flat year over year (up 1%) and down 1% sequentially. The mix shifted sharply: net interest income fell 9% year over year to $11.9 billion as higher funding costs and lower loan and deposit balances weighed, while noninterest income rose 19% to $8.8 billion on stronger trading, investment banking, asset-based advisory fees, and venture capital gains. Noninterest expense rose 2% year over year but fell 7% sequentially to $13.3 billion, and the provision for credit losses was $1.2 billion versus $1.7 billion a year ago.

Return on equity was 11.5% and return on average tangible common equity was 13.7%, with an efficiency ratio of 64%. Credit quality showed modest deterioration. Net loan charge-offs rose to $1.3 billion^c (0.57% of average loans annualized), up from 0.50% in the first quarter, driven by commercial real estate office losses and higher credit card charge-offs.

Nonperforming assets increased 5% sequentially to $8.7 billion^d, again led by CRE office. The allowance for credit losses for loans was essentially stable at $14.8 billion, or 1.61% of total loans. Capital remained strong, with a preliminary Standardized CET1 ratio of 11.0% and the company repurchased $6.1 billion of common stock in the quarter.

Management also guided to a third-quarter dividend increase to $0.40 per share from $0.35, and the Federal Reserve's final stress capital buffer for October 2024 through September 2025 is expected to rise to 3.8% from 2.9%. For investors, the key takeaways are that fee-based and markets revenue are offsetting a meaningful decline in net interest income, that expense discipline improved sequentially, and that credit costs in commercial real estate office and credit cards bear monitoring.

Management raised its 2024 noninterest expense outlook to about $54.0 billion from $52.6 billion, citing higher revenue-related compensation and operating losses. All figures are preliminary and subject to change in the Form 10-Q.

02—Key points

Key Highlights

Net income of $4.9 billion ($1.33 diluted EPS) rose 6% year over year and 11% sequentially per share, with ROE of 11.5% and ROTCE of 13.7%.
Net interest income fell 9% year over year to $11.9 billion as higher deposit and funding costs and lower loan balances offset higher earning-asset yields; net interest margin was 2.75%, down from 3.09%.
Noninterest income rose 19% year over year to $8.8 billion, driven by trading (up 29%), investment banking fees (up 70%), asset-based advisory fees, and venture capital gains.
Noninterest expense fell 7% sequentially to $13.3 billion but rose 2% year over year on higher operating losses and customer remediation accruals; full-year 2024 expense guidance was raised to about $54.0 billion.
Net loan charge-offs rose to 0.57% of average loans from 0.50% in 1Q24, led by commercial real estate office losses and higher credit card charge-offs; nonaccrual loans rose to $8.4 billion.
Capital position remained strong with a preliminary Standardized CET1 ratio of 11.0%, $6.1 billion of share repurchases in the quarter, and a planned third-quarter dividend increase to $0.40 per share from $0.35.
The stress capital buffer is expected to rise to 3.8% from 2.9% effective October 1, 2024, subject to the Federal Reserve's final publication by August 31, 2024.

03—Questions

Frequently Asked Questions

Why did net interest income decline so sharply despite higher asset yields?
Deposit and funding costs rose faster than asset yields. Average interest-bearing deposit costs increased to 2.46% from 1.43% a year earlier, and customers moved cash into higher-yielding deposit products and alternatives. Lower average loans (down 3% year over year) and lower deposit balances in Consumer Banking and Lending and Wealth and Investment Management further reduced net interest income. Management expects 2024 net interest income to decline roughly 8-9% from the 2023 level of $52.4 billion.
Is the credit quality trend deteriorating, and where is the risk concentrated?
Credit metrics weakened modestly in the quarter. Net charge-offs rose to $1.3 billion from $1.15 billion, and nonperforming assets increased $410 million to $8.7 billion. The increase was concentrated in commercial real estate, particularly office, where CRE nonaccruals rose by $408 million and office nonaccruals rose by $557 million. In consumer lending, the credit card net charge-off rate rose to 4.96% from 4.48%. The allowance for credit losses for loans was stable at $14.8 billion, or 1.61% of loans, which management views as consistent with its expectations.
How much capital is Wells Fargo returning, and is the dividend increase secure?
The company repurchased $6.1 billion of common stock (100.5 million shares) in the second quarter and over $12 billion in the first half of 2024. Management said it expects to raise the third-quarter dividend to $0.40 per share from $0.35, a 14% increase, subject to Board approval at its July meeting. The increase is supported by a CET1 ratio of 11.0%, well above the 8.9% regulatory minimum plus buffers. However, the stress capital buffer is expected to increase to 3.8% from 2.9%, which raises the required capital level and could constrain future buybacks.
What is driving the increase in noninterest income and is it sustainable?
Noninterest income growth came from several sources: higher trading revenue in Markets (equities up 41% year over year), investment banking fees up 70% on broad-based deal activity, higher asset-based advisory fees from improved market valuations, and better venture capital results. Part of the year-over-year increase also reflects a new accounting standard for renewable energy tax credit investments, which moved amortization into income tax expense. Trading and investment banking revenues are market-dependent and can be volatile, so investors should distinguish cyclical gains from recurring fee growth such as asset-based advisory fees.
What do the 2024 expense and operating loss trends imply for the outlook?
Management raised its 2024 noninterest expense guidance to approximately $54.0 billion from about $52.6 billion. The increase reflects higher revenue-related compensation, which management notes is offset by higher fee income, as well as operating losses and customer remediation accruals that have run above expectations in the first half. The first half also included $336 million of FDIC special assessment expense. Management cautioned that outstanding litigation, regulatory, and customer remediation matters could further affect operating losses, so expense outcomes carry continuing uncertainty.

04—Continue

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