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Wells Fargo Benefits From Higher Rates, Plans Cost Reduction

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Wells Fargo & Co. is benefiting from higher interest rates and increased fee income from cards and deposit accounts as Chief Executive Officer Tim Sloan plans cost cuts and works to recover from a scandal in the retail banking unit.

Fourth-quarter net interest income, a measure of earnings from customer deposits, climbed to $12.4 billion from $11.6 billion a year earlier, the San Francisco-based bank said Friday in a statement. Net interest margin improved to 2.87 percent last quarter from 2.82 percent in the three months ended Sept. 30.

Wells Fargo advanced 1 percent, to $55.06 at 2:38 p.m. in New York, the fifth-biggest gain in the 24-company KBW Bank Index.

“We believe investors are looking past the noise and looking to the margin improvement which should drive shares higher,” Keefe, Bruyette & Woods Inc. analysts led by Brian Kleinhanzl wrote in a note to investors.

The lender underperformed rivals last year as it was fined by regulators for opening accounts without customer authorizations. While expenses rose in the fourth quarter from a year earlier, and fallout from the lapses made it harder to attract more customers, revenue held steady. 

Income from credit-card fees advanced to $1 billion from $966 million a year earlier, while deposit-account service charges rose to $1.36 billion from $1.33 billion. Analysts expected revenue from both operations would probably fall in the first full quarter since regulators fined the lender $185 million over employees opening legions of accounts without customer approval. The bank doesn’t expect service charges on deposit accounts to fall because of the scandal, Chief Financial Officer John Shrewsberry said in a telephone interview.

Customer Loyalty

“The numbers that are in there now reflect the customers we have today doing more business with us, doing all of their business with us,” Shrewsberry said. “That doesn’t seem to be changing.”Net income fell to $5.27 billion, or 96 cents a share, from $5.58 billion, or $1, a year earlier, as mortgage revenue slipped and the bank incurred costs tied to hedges on long-term debt. Barker said operating profit was $1.01 a share, beating his estimate by 4 cents.

Expenses climbed 4.9 percent to $13.2 billion as the firm spent more on employee salaries, bonuses and benefits. The lender said it plans to reduce annual expenditures, including by shrinking its branch network, trimming travel costs and centralizing some operations. Shrewsberry told analysts on a conference call that the firm plans to close more than 400 branches in the next two years, reducing its total from 6,065 at year-end.

Wealth Management

Wholesale banking profit rose 4.3 percent to $2.19 billion from a year earlier, while wealth-management net income gained almost 10 percent to $653 million.

Wells Fargo has rallied 21 percent since Donald Trump won the U.S. presidential election in early November. His surprise victory pushed interest rates higher, allowing banks to charge more for loans, and led investors to speculate that economic growth will accelerate while government regulation eases.

Improved net interest margins were “driven by growth in loans, investment securities and trading assets, and the impact from higher interest rates,” the bank said.

— Check out SEC Fines Morgan Stanley $13M for Overcharging Clients on ThinkAdvisor.


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