Wells Fargo misses interest income estimates as deposit costs bite; shares slump

By Noor Zainab Hussain, Saeed Azhar and Manya Saini

(Reuters) -Wells Fargo's second-quarter profit declined and the lender missed analysts' estimates for interest income on higher deposit costs amid intense competition for customers' money, sending its shares down more than 6%.

Net interest income (NII) -- or the difference between what a bank earns on loans and pays out for deposits -- slid 9% to $11.92 billion. Analysts on average had expected $12.12 billion, according to LSEG data.

NII could fall 7% to 9% this year, it reiterated on Friday.

"At this point in the year, we expect that to be in the upper half of that range, or approximately down 8% to 9%," Wells Fargo's finance chief, Michael Santomassimo, told reporters on an earnings call.

He said NII could hit a trough by the end of the year.

Higher net interest income was part of the investor "bull thesis" coming into the quarter, so the management's new guidance of NII is likely to pressure the stock, said Citigroup analyst Keith Horowitz in a note.

Wells Fargo CEO Charlie Scharf said the U.S. economy remains strong, driven by a healthy labor market, but cautioned risks from higher inflation rate and rates.

"The economy is slowing and there are continued headwinds from still elevated inflation and elevated interest rates," he said during the earnings call.

Average deposit costs jumped to 1.84% in the second quarter, from 1.13% a year earlier, the bank said.

Banks are having to pay more to retain customers who are hunting for greater yields while also dealing with the fallout of higher-for-longer interest rates as borrowers balk at taking out new loans.

"Rate expectations continue to change ... We'll hopefully have to see how that plays out and how that translates into action," Santomassimo said.

Net income fell to $4.91 billion for the three months ended June 30 versus $4.94 billion, a year earlier.

The lender also said it expects 2024 noninterest expense to be about $54 billion, up from its prior forecast of about $52.6 billion.

Wells Fargo's profit, however, beat expectations in the second quarter, buoyed by a jump in fees from investment banking.

On a per-share basis, the company reported $1.33, compared with LSEG estimates of $1.29.

The fourth largest U.S. bank said its net charge-offs -- or the amount of loans that are unlikely to be recovered -- for commercial real estate (CRE) came in at $271 million, or 74 basis points of average loans, predominantly driven by the office segment.

The bank has worked to reduce its CRE exposure over the last year as the sector's troubles exacerbated. While it had hiked provisions to cover potential defaults, particularly in the office space, executives have said the CRE portfolios remain manageable.

INVESTMENT BANKING BOOST

Investment banking was a bright spot for the bank in the second quarter. Rival JPMorgan Chase also reported a 25% jump in second-quarter profit on Friday, buoyed in part by rising investment banking fees.

Citigroup's profit was boosted by a 60% surge in investment banking revenue in the second quarter.

"We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income," Wells Fargo CEO Charlie Scharf said in a statement.

Investment banking revenue surged 38% to $430 million for the bank.

Under Scharf, Wells Fargo has beefed up its investment banking and trading activities, recruiting some top executives from rivals.

Merger and acquisition volumes hit $1.6 trillion globally in the first half of the year, up 20% from a year earlier, Dealogic data showed. Equity capital market volumes climbed 10% during the same period.

Still, Wells Fargo remains shackled by a $1.95 trillion asset cap that prevents it from growing until regulators deem it has fixed problems from a fake accounts scandal.

The bank still has eight open consent orders after the U.S. Office of the Comptroller of the Currency in February terminated a 2016 punishment.

"The numerous internal metrics we track show that the work is clearly improving our control environment. While we see clear forward momentum, it's up to our regulators" to determine when regulatory punishments are lifted," Scharf said

(Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Saeed Azhar in New York; Editing by Lananh Nguyen, Sriraj Kalluvila and Nick Zieminski)