Daily Management Review

Wells Fargo's Profit Exceeds Expectations Due To Rising Rates. Increase Interest Revenue


Wells Fargo's Profit Exceeds Expectations Due To Rising Rates. Increase Interest Revenue
As a result of the U.S. Federal Reserve's stricter monetary policy and higher interest rates, Wells Fargo & Co. on Friday exceeded earnings forecasts for the first quarter.
In contrast to a discharge of $787 million a year earlier, the bank set aside $1.21 billion in the quarter to cover for future loan losses.
Although rate increases have supported interest income at US lenders in recent quarters, the gains have been accompanied by growing concerns that the economic storm clouds would get thicker as the Fed keeps rates "higher for longer".
According to the bank, the allowance for credit losses increased by $643 million to reflect an increase in commercial real estate loans, especially office loans, as well as an increase in credit card and auto loans.
In light of the widespread use of remote working, which has caused offices in major cities to become vacant, analysts have cautioned against additional deterioration in the commercial real estate (CRE) market.
According to Wells Fargo, as of the end of March, there were $154.7 billion in outstanding CRE loans, or 16% of all loans, and $35.7 billion in office loans.
Shares of the bank increased 3.08% in premarket trading.
Fears of an economic downturn are growing as a result of the Fed's aggressive interest rate increases to control inflation and the recent upheaval in the banking industry brought on by the loss of two mid-sized banks. As a result, banks are increasing their rainy day savings.
Last month's failure of Silicon Valley Bank and Signature Bank led to a crash in bank stock prices as investors worried about more general problems in the sector.
When one of many major American banks that provided First Republic Bank with a combined $30 billion in deposits in March, Wells Fargo made a $5 billion contribution when the local lender became entangled in the issue.
"We are glad to have been in a strong position to help support the U.S. financial system during the recent events that impacted the banking industry. Regional and community banks are an important part of our financial system," CEO Charlie Scharf said in a statement on Friday.
At Wells Fargo, deposits decreased 2% to $1.36 trillion at the end of March from $1.38 trillion at the end of 2017.
To $13.34 billion, net interest income increased 45%.
For the three months ended March 31, the bank earned $1.23 per share, excluding one-time items. According to statistics from Refinitiv IBES, it was less than the average estimate of analysts, which was $1.13 per share.
The first quarter profit of the largest U.S. lender, JPMorgan Chase & Co., was also helped by higher interest rates, which helped it weather the banking crisis.
"Both Wells Fargo and JP Morgan delivered very, very solid results, blowing past the expected earnings. Deposits were down, but really these big banks have been so awash in deposits for the past few years, that they have not known how to put the money to work. The only part of the businesses that looked weak was investment banking," said Opimas CEO Octavio Marenzi.
In the bank's commercial banking section, average loans increased by 15%, while commercial loans increased by about 7% from the previous year.
Additionally, Wells Fargo is still attempting to limit the impact from a scandal involving its sales practices that resulted in large fines and a Fed-imposed asset cap.
Overall, non-interest expenses decreased from $13.85 billion to $13.68 billion, primarily due to fewer operating losses.
The bank reported operating losses of $3.3 billion in the fourth quarter of 2022 as a result of legal actions, consumer satisfaction, and regulatory issues connected to the scandal.
Scharf stated in 2020 that he intended to make cost reductions totaling $10 billion over several years.
In the first quarter, Wells Fargo's total revenue increased 17% to $20.73 billion.