Wells Fargo falls despite profit beat as executives warn of higher expenses

Key Points
  • Wells Fargo shares fell despite beating profit forecasts as investors scrutinized lower net interest income than hoped and executive comments on higher expenses.
  • Net interest income — a main driver of bank profits — came in shy of estimates at $12.1 billion as the bank notes a "lower interest rate environment."
  • Chief Financial Officer John Shrewsberry said that expense forecasts put Wells "at the higher end of our range for this year and, currently, our reforecasted 2020 is relatively flat with that number."
Wells Fargo earnings: $1.30 per share, vs $1.15 EPS expected

Wells Fargo shares fell on Tuesday despite beating profit forecasts as investors punished lower net interest income than hoped and comments from management that expenses could remain on the higher end of projections into 2020.

The bank said its net income was $6.2 billion in the second quarter, up from $5.9 billion in the first quarter and $5.2 billion in the year-earlier period. However, net interest income — a main driver of bank profits — came in just shy of estimates at $12.1 billion. Net interest margin (NIM) fell 9 basis points from the prior quarter to 2.82% thanks to higher deposit costs and a "lower interest rate environment."

Here's how the company did compared with what Wall Street expected:

  • Earnings: $1.30 per share vs. $1.15 cents per share forecast by Refinitiv.
  • Revenue: $21.58 billion vs. $20.93 billion forecast by Refinitiv.

The bank's chief financial officer, John Shrewsberry, said on the company's earnings call later Tuesday that the company's expenses look to be on track to hit the higher end of a previously announced $52 billion to $53 billion range.

"Last quarter, we said we expected net interest income to decline 2% to 5% this year compared with 2018 and if the rate environment we are in today persists, we would expect to be near the low-end of the range," Shrewsberry said on the call.

On expenses, "our most recent forecast puts us at the higher end of our range for this year and, currently, our reforecasted 2020 is relatively flat with that number," he added, noting increased costs associated with risk and technological investments.

The company's stock fell 3% by the closing bell Tuesday, its worst day of trading since March.

The bank's loan balances at the end of June totaled $949.9 billion, up $1.6 billion from the first quarter as real estate, credit card and automobile lending all rose. Banks turn a profit by charging borrowers higher, longer-term interest rates compared with the lower, short-term interest rates they dole out to savers.

Pedestrians pass in front of a Wells Fargo bank branch in New York.
Eric Thayer | Bloomberg | Getty Images

"Considering the operating miss and a big decline in NIM, we expect the stock to underperform peers today," Piper Jaffray analyst Kevin Barker wrote shortly after the earnings release. "We expect NIM to continue declining through 2019 due to guidance from higher deposit costs pressure on loan yields from lower rates."

Despite the forecast for higher expenses, Shrewsberry highlighted the bank's strong capital position as it returned $6.1 billion to shareholders through dividends and share repurchases, up 52% from the year-earlier period. He also mentioned the bank's plan to increase its quarterly dividend rate in the third quarter to 51 cents.

The nation's fourth-largest bank also said that recent customer surveys showed satisfaction scores rising to multiyear highs, helping buoy primary consumer checking customers 1.3% from the year-earlier period to 24.3 million.

Wells Fargo's nonperforming assets fell $1 billion from the first quarter to $6.3 billion, well short a $7.26 billion estimate from StreetAccount. The bank's efficiency ratio was lower than forecast, coming in at 62.3% for the quarter. A higher efficiency ratio indicates a bank is spending more money than it is making.

The bank and its reputation remain mired in regulatory inquisition stemming from its 2016 sales scandal that's since claimed the jobs of two CEOs. Tim Sloan, the bank's most recent chief, stepped down in March after 31 years at the company.

The board has been searching for a new CEO ever since, reportedly struggling to persuade a number of outside bank executives to consider the role. Still, the board isn't ruling out a company insider as some look to make Parker permanent chief. Interim CEO Parker said on the company's earnings call later Tuesday morning that the board will make no comment on the search until a final decision has been made.

The company's stock is down about 0.5% over the last three months versus the S&P 500's 3.7% gain. The stock is up only 1% this year, compared with double-digit returns for most other major banks.