With Net Interest Income Down 11%, Wells Fargo Posts Lower Earnings and Revenue

Wells Fargo reported stronger-than-expected third-quarter earnings on Friday, driving its stock higher in morning trading. The bank’s performance exceeded Wall Street’s projections, even as it faced a notable decline in net interest income, a critical measure of earnings from lending activities.

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Here’s a breakdown of what the bank reported compared to analysts’ expectations, according to a survey conducted by LSEG (formerly known as Refinitiv):

• Adjusted earnings per share: $1.52 versus $1.28 expected
• Revenue: $20.37 billion versus the expected $20.42 billion

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Following the release of these results, shares of Wells Fargo surged more than 4%. The earnings beat came despite challenges in the bank’s core lending business, which saw a significant drop in net interest income. Net interest income, which represents the difference between the interest income generated by loans and the interest paid to depositors, is a crucial indicator of a bank’s financial health.

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Wells Fargo reported $11.69 billion in net interest income for the third quarter, reflecting an 11% decrease compared to the same period last year. This was also slightly below the $11.9 billion expected by analysts, according to data from FactSet. The decline in net interest income was attributed to rising funding costs, as more customers moved their deposits into higher-yielding accounts to take advantage of rising interest rates.

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Despite this decline, Wells Fargo’s CEO Charles Scharf highlighted the bank’s evolving earnings profile. In a statement, Scharf explained that the company has been transforming its business model over the past few years, investing strategically in certain areas while pulling back from or selling off other segments. “Our earnings profile is very different than it was five years ago as we have been making strategic investments in many of our businesses and de-emphasizing or selling others,” Scharf said. He also noted that the bank’s revenue streams are now more diversified, with fee-based income increasing by 16% in the first nine months of the year. This diversification helped offset the headwinds caused by declining net interest income.

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In terms of overall profitability, Wells Fargo’s net income for the third quarter fell to $5.11 billion, or $1.42 per share, down from $5.77 billion, or $1.48 per share, in the same quarter a year ago. The bank’s net income was impacted by $447 million, or 10 cents per share, in losses on debt securities. This reduction in net income contributed to the year-over-year dip in revenue, which decreased from $20.86 billion to $20.37 billion.

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The bank also set aside $1.07 billion as a provision for credit losses, slightly down from the $1.20 billion it allocated for the same purpose last year. Provisions for credit losses are funds banks reserve in anticipation of potential loan defaults, and the decline indicates that Wells Fargo may be seeing some stabilization in loan performance despite the challenging economic environment.

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One of the highlights of Wells Fargo’s third-quarter performance was its aggressive stock buyback program. The bank repurchased $3.5 billion worth of common stock during the quarter, bringing the total amount of stock repurchased in 2024 to more than $15 billion. This represents a 60% increase compared to the previous year, underscoring Wells Fargo’s commitment to returning capital to shareholders.

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Despite the positive earnings surprise and the bank’s strong stock buyback activity, Wells Fargo’s stock has underperformed the broader market in 2024. The bank’s shares have gained 17% year-to-date, lagging behind the S&P 500, which has posted stronger returns during the same period.

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Wells Fargo’s third-quarter results reflect the challenges facing the broader banking industry in a higher interest rate environment. Rising interest rates have led to increased competition for deposits, as consumers and businesses seek out higher-yielding products. This has raised funding costs for banks, squeezing their profit margins on lending. At the same time, concerns about potential loan defaults in an uncertain economic environment have prompted banks to set aside more capital as provisions for credit losses.

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However, Wells Fargo’s ability to outperform earnings expectations despite these challenges demonstrates the bank’s resilience. The company’s diversified revenue streams, including a growing reliance on fee-based income, have helped offset some of the pressure on its lending business. Additionally, its robust capital return program through stock buybacks has supported shareholder value.

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As the banking industry continues to navigate the complex economic landscape, Wells Fargo’s strategic focus on balancing its lending business with fee-based revenue and capital returns may position it well for future growth. CEO Charles Scharf’s emphasis on making targeted investments and adjusting the bank’s business model to adapt to changing market conditions highlights the company’s long-term vision.

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In summary, Wells Fargo’s third-quarter earnings report showcased a solid performance, driven by better-than-expected earnings per share and a disciplined approach to managing costs and capital. Despite challenges in net interest income, the bank’s focus on diversification and stock repurchases provided a boost to its overall financial health, helping it navigate the evolving economic environment while delivering value to shareholders.

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