Wells Fargo (WFC.US) reported mixed third-quarter results.
Q3 revenue rose 2% year-over-year to $21.87 billion, falling short of market expectations of approximately $22.32 billion.
GAAP earnings per share came in at $1.87, up 13% year-over-year, slightly beating market expectations.
Q3 net interest income — the difference between what lenders earn from loans and what they pay on deposits — grew 5% in the quarter to $12.52 billion, driven by higher loan and investment securities balances, repricing of fixed-rate assets amid declining interest rates, and expansion of the market business balance sheet, partially offset by lower yields on floating-rate assets and higher costs on interest-bearing commercial deposits.
Non-interest income was $9.353 billion, down 1% year-over-year, primarily due to lower trading gains, reduced leasing income following the sale of the railcar leasing business earlier in the year, and declines in venture capital gains and mortgage banking income.
On credit costs, the provision for credit losses in the quarter was $1.029 billion, far exceeding $681 million in the same period last year, mainly reflecting increased reserves from higher commercial and industrial loan and auto loan balances, while commercial real estate reserves declined somewhat; net charge-offs were $983 million, with an annualized net charge-off rate of 0.38%, essentially flat compared to the same period last year.
Since the Federal Reserve lifted its years-long regulatory cap on the bank's assets, Wells Fargo has been able to deploy more of its balance sheet, giving it greater room to compete for loans.
Wells Fargo has relied on credit cards and auto loans to expand its consumer lending business, riding healthy consumer trends.
On capital and scale, average loans and average deposits both grew 11% year-over-year (reaching $1.0334 trillion and $1.4829 trillion, respectively); Q3 ROTCE was 16.3%, with the first three quarters at 16.2% (compared to 14.7% in the same period last year); ROE was 13.8%; the Common Equity Tier 1 (CET1) ratio fell to 10.0% (from 11.0% in the same period last year), mainly due to share buybacks and balance sheet expansion.
The bank repurchased 28.6 million common shares for approximately $2.5 billion in the quarter.
Due to substantial commercial investment in artificial intelligence, strong consumer spending, and a relatively stable labor market, the U.S. economy has maintained steady growth.
"Despite an uncertain economic environment and mixed consumer sentiment, our data shows that our consumer and business customers are in good shape," CEO Charlie Scharf said in a statement.
The U.S. banking industry has also benefited from reinvesting maturing assets into higher-yielding investment instruments, boosting overall profit margins.
Chief Financial Officer Mike Santomassimo expressed optimism last month about the bank's loan growth forecast for the year, saying that despite concerns that rising costs could squeeze household budgets, credit and spending trends remain healthy.
Although the market expected strong bank earnings, bank stocks have recently been sold off as investors remain cautious about the prospect that the Federal Reserve's continued rate hikes could dampen economic activity.
The KBW Bank Index has fallen more than 12% from its August high.
While analysts expect rising bond yields to support Wells Fargo's net interest income in the near term, increasing funding costs could weigh on economic growth.
Following the earnings release, the bank's shares fell about 1% in pre-market trading.
As of Monday's close, the stock has declined more than 10% year-to-date.
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