Wells Fargo misses expectations on interest income, revenue; shares fall

By Arasu Kannagi Basil and Nivedita Balu

April 14 (Reuters) – Wells Fargo warned rising energy prices will likely affect the U.S. economy, after the bank reported first-quarter interest income and revenue on Tuesday that missed Wall Street expectations, sending shares down 5%.

Wall Street banks face fresh challenges as the Middle East conflict pushes oil prices higher, raising fears of inflation that could keep interest rates elevated and weigh on growth. For Wells Fargo, which earns over 40% of its revenue from consumer banking, higher energy prices also mean consumers are paying more for gas on their credit cards.

“It’s likely energy prices will have some impact on the economy,” CEO Charlie Scharf told analysts, adding that consumers remained strong.

Chief Financial Officer Mike Santomassimo said consumers were probably spending 25% to 30% more on gas than they did before the conflict, which started February 28.

NII UNDER SCRUTINY

Rate cuts tend to pressure interest income even as they boost borrowing and reduce deposit ‌costs. Net interest income — the difference between earnings on loans and payments on deposits — is a key focus for investors assessing the bank’s progress in increasing its interest income after the U.S. Federal Reserve lifted its asset cap.

NII was $12.1 billion in the quarter, compared with analysts’ average estimate of $12.3 billion, according to data compiled by LSEG.

Wells Fargo’s $21.45 billion in revenue missed the average estimate of $21.8 billion.

“(The quarter) was a little softer than we had hoped,” said Scott Siefers, analyst at Piper Sandler, adding that compressed margins overshadowed strong loan and deposit growth.

Wells Fargo reported $1.60 per share, compared with the average estimate of $1.58.

STRONG CONSUMER FINANCIAL HEALTH

Scharf said consumers were spending more than they did a year ago, including on gas, and that their financial health remained strong.

“We have seen historically that it often takes consumers several months to reduce their spend levels on other categories to adjust for higher oil prices. And while we don’t know the exact timing, we’d expect to see the same in the second half of the year,” Scharf said.

“The duration and severity will be driven by the level and duration of higher oil prices.”

Wells Fargo’s loan book surged 11% past $1 trillion in the quarter, after limited growth under its seven-year asset cap.

The bank has aggressively increased its loan book by focusing on credit cards and auto loans, after the Fed lifted the $1.95 trillion asset cap last year, allowing it to expand its balance sheet and pursue stronger growth across businesses.

COMFORTABLE WITH PRIVATE CREDIT EXPOSURE

Wells Fargo had $210.2 billion in loans to financial firms other than banks as of March 31.

Concerns about private credit have deepened in recent months, as negative headlines drew intense scrutiny to the asset class that has expanded rapidly over the past decade.

The high-profile bankruptcies of U.S. auto parts supplier First Brands and car dealership Tricolor last year turned the spotlight on Wall Street banks’ exposure to non-depository financial institutions such as private equity and private credit managers.

“We’re quite comfortable with … the risk that we have in that underlying portfolio,” Santomassimo said.

Corporate debt finance portfolio – Wells Fargo’s secured lending to asset managers and most of its exposure to private credit – accounted for $36.2 billion of loans.

Wells Fargo cut headcount by 7% in the quarter, as Scharf focuses on streamlining its workforce, prioritizing efficiency and cost cuts to fund long-term growth initiatives.

The bank had 200,999 employees at the end of March, compared with 205,198 as of December 31. Its headcount has fallen every quarter since late 2020.

(Reporting by Arasu Kannagi Basil in Bengaluru and Nivedita Balu in Toronto; Editing by Shinjini Ganguli, Rod Nickel)