Why did Wells Fargo's net interest income decline so sharply year over year?

Net interest income fell 11% to $11.7 billion, driven by higher funding costs as customers migrated to higher-yielding deposit products, changes in deposit mix and pricing (including higher pricing on sweep deposits in advisory brokerage accounts), and lower loan balances. These were partly offset by higher yields on earning assets. Average loans fell 3% to $910.3 billion, and the net interest margin declined to 2.67% from 3.03%.

What drove the increase in noninterest income?

Noninterest income rose 12% to $8.7 billion, reflecting improved venture capital investment results, higher asset-based fees in Wealth and Investment Management on higher market valuations, higher investment banking fees (up 37%), higher trading gains in Markets, and higher deposit-related fees. These gains were partly offset by the $447 million net loss on debt securities from the portfolio repositioning.

How strong is Wells Fargo's capital position and what are its return plans?

The preliminary CET1 ratio under the Standardized Approach was 11.3%, up from 11.0% a year earlier, and the company's binding stress capital buffer rose to 3.8%, setting a CET1 regulatory minimum and buffers of 9.8% effective October 1, 2024. The company repurchased $3.5 billion of stock in Q3 and raised its quarterly dividend to $0.40 per share from $0.35. Diluted share count is down 7% year over year.

Is credit quality deteriorating?

Mixed. Net loan charge-offs were $1.1 billion (0.49% of average loans) versus $850 million (0.36%) a year earlier, reflecting higher credit card charge-offs. However, they declined from $1.3 billion in Q2, driven by lower commercial real estate charge-offs, mainly in office. Nonperforming assets fell 3% sequentially to $8.4 billion, and the allowance for credit losses for loans was $14.7 billion, or 1.62% of total loans.

What should investors watch for in the coming quarters?

Key watch items include whether net interest income stabilizes, since management expects 4Q24 to be roughly in line with 3Q24 but full-year 2024 to be down about 9%; whether noninterest expense stays near the $54.0 billion full-year guidance given pending litigation, regulatory and customer remediation matters; the trajectory of commercial real estate office credit; and whether fee growth continues to offset net interest income pressure. All figures are preliminary until the Form 10-Q is filed.

WFC 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed October 11, 2024. Cited figures are marked; the original filing is the authoritative source.

Wells Fargo reported third quarter 2024 net income of $5.1 billion^a, or $1.42 per diluted share, up from $4.9 billion and $1.33 in the second quarter but down from $5.8 billion and $1.48 a year earlier.

Total revenue fell 2% year over year to $20.4 billion^b, as an 11% decline in net interest income (to $11.7 billion) was largely offset by a 12% increase in noninterest income (to $8.7 billion), driven by venture capital gains, higher asset-based fees in Wealth and Investment Management, and stronger investment banking and trading results. Noninterest expense was roughly flat at $13.1 billion, and the efficiency ratio held at 64%. Results include a $447 million net loss on debt securities tied to a portfolio repositioning, which reduced EPS by $0.10.

Capital generation remained a central theme. The CET1 ratio rose to a preliminary 11.3% from 11.0% a year earlier, and the company repurchased $3.5 billion^c of stock in the quarter (over $15 billion year to date) while raising the quarterly dividend 14% to $0.40 per share. Diluted share count is down 7% year over year.

Credit quality showed modest deterioration in charge-offs, with net loan charge-offs rising to $1.1 billion^d (0.49% of average loans) from $850 million a year ago, although they declined sequentially, and nonperforming assets fell 3% from the prior quarter. Management guided that 2024 net interest income will be down about 9% from 2023's $52.4 billion, with fourth-quarter net interest income expected to be roughly in line with third quarter.

Full-year 2024 noninterest expense is expected at about $54.0 billion, unchanged from prior guidance, though outstanding litigation, regulatory and customer remediation matters could affect operating losses. All figures are preliminary and subject to final review in the Form 10-Q.

02—Key points

Key Highlights

Net income of $5.1 billion ($1.42 diluted EPS), up 4% sequentially and down 11% year over year; ROE of 11.7% and ROTCE of 13.9%
Total revenue of $20.4 billion, down 2% year over year: net interest income fell 11% to $11.7 billion while noninterest income rose 12% to $8.7 billion
$447 million ($0.10 per share) net loss on debt securities from an investment portfolio repositioning, a notable one-time drag on the quarter
Capital return remained strong: $3.5 billion of buybacks in Q3 (over $15 billion year to date) and a 14% dividend increase to $0.40 per share; CET1 ratio of 11.3%, up 30 bps year over year
Net loan charge-offs rose to $1.1 billion (0.49% annualized) from $850 million a year earlier, but improved from $1.3 billion in Q2, with nonperforming assets down 3% sequentially
2024 outlook: net interest income expected down about 9% from 2023; noninterest expense guidance held at about $54.0 billion
Efficiency ratio held at 64%, and pre-tax pre-provision profit of $7.3 billion was down 6% year over year

03—Questions

Frequently Asked Questions

Why did Wells Fargo's net interest income decline so sharply year over year?
Net interest income fell 11% to $11.7 billion, driven by higher funding costs as customers migrated to higher-yielding deposit products, changes in deposit mix and pricing (including higher pricing on sweep deposits in advisory brokerage accounts), and lower loan balances. These were partly offset by higher yields on earning assets. Average loans fell 3% to $910.3 billion, and the net interest margin declined to 2.67% from 3.03%.
What drove the increase in noninterest income?
Noninterest income rose 12% to $8.7 billion, reflecting improved venture capital investment results, higher asset-based fees in Wealth and Investment Management on higher market valuations, higher investment banking fees (up 37%), higher trading gains in Markets, and higher deposit-related fees. These gains were partly offset by the $447 million net loss on debt securities from the portfolio repositioning.
How strong is Wells Fargo's capital position and what are its return plans?
The preliminary CET1 ratio under the Standardized Approach was 11.3%, up from 11.0% a year earlier, and the company's binding stress capital buffer rose to 3.8%, setting a CET1 regulatory minimum and buffers of 9.8% effective October 1, 2024. The company repurchased $3.5 billion of stock in Q3 and raised its quarterly dividend to $0.40 per share from $0.35. Diluted share count is down 7% year over year.
Is credit quality deteriorating?
Mixed. Net loan charge-offs were $1.1 billion (0.49% of average loans) versus $850 million (0.36%) a year earlier, reflecting higher credit card charge-offs. However, they declined from $1.3 billion in Q2, driven by lower commercial real estate charge-offs, mainly in office. Nonperforming assets fell 3% sequentially to $8.4 billion, and the allowance for credit losses for loans was $14.7 billion, or 1.62% of total loans.
What should investors watch for in the coming quarters?
Key watch items include whether net interest income stabilizes, since management expects 4Q24 to be roughly in line with 3Q24 but full-year 2024 to be down about 9%; whether noninterest expense stays near the $54.0 billion full-year guidance given pending litigation, regulatory and customer remediation matters; the trajectory of commercial real estate office credit; and whether fee growth continues to offset net interest income pressure. All figures are preliminary until the Form 10-Q is filed.

04—Continue

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