In the wake of the Silicon Valley Bank (SVB) collapse, the banking sector has been grappling with uncertainty and eagerly awaiting the financial reporting season to gauge the industry’s health. Amid concerns of a potential banking crisis similar to the 2008 financial meltdown, Wells Fargo’s Q1 2023 earnings call on April 14, 2023, provided some much-needed insight. Following the release of their earnings results, the market reacted cautiously but with a sense of relief, signalling a tempered optimism in the financial sector’s resilience.
Steady Progress Amid Industry Challenges
The company reported a net income of $5 billion in the first quarter or $1.23 per diluted common share. The CET1 ratio increased to 10.8%, and share repurchases of $4 billion was made. The liquidity coverage ratio stood 22 percentage points above the regulatory minimum. Consumer Banking and Lending deposits made up over 60% of total deposits.
Nonperforming assets increased by 7% due to higher commercial real estate nonaccrual loans. The allowance for credit losses increased to $643 million, reflecting a rise in commercial real estate loans, credit cards, and auto loans. The company has been derisking its office portfolio and increasing its allowance for credit losses in the past four quarters. Average loans grew 6% YoY, while average deposits declined 7%.
Consumer Banking and Lending saw mixed results, with mortgage rates remaining elevated and auto revenue declining, while credit card revenue increased. Commercial Banking experienced revenue growth, while Wealth and Investment Management revenue dropped slightly.
Strategic Priorities
Most businesses and consumers segment remains strong, with delinquencies and net charge-offs increasing slowly as anticipated. Weakness in the commercial real estate office sector persists, prompting the company to tighten credit for higher-risk segments while continuing to lend broadly.
Both commercial and consumer loans and spending have experienced growth, while deposits have decreased as customers seek higher-yielding alternatives. The company maintains a strong capital and liquidity position and a diversified business model, which helps reduce risk concentration. The top priority is to develop a risk and control framework suitable for the company.
Question & Answer
Kenneth Usdin of Jefferies inquired about the $1.3 billion net interest income and how it relates to the current environment, asking if it was an exceptional result or if there’s anything to consider going forward.
Wells Fargo CFO’s Michael Santomassimo explained that they benefited from the volatility in the rate market and other asset classes during the quarter. The consistent investment in core platforms, such as FX, should yield good results over time, but the quarter’s results were significantly influenced by market volatility.
Steven Chubak of Wolfe Research asked about expense trends in the consumer segment, which has a higher efficiency ratio compared to peers, and the potential benefits from a reduction in mortgage and the normalised efficiency target.
Wells Fargo CFO’s Michael Santomassimo acknowledged the need for more work in the consumer segment, including simplifying the servicing side of the mortgage business and rationalising the branch footprint, with consistent quarter-on-quarter declines in headcount and other factors. The end goal is to match best-in-class peers in efficiency. Wells Fargo CEO’s Charles Scharf added that the home lending business is currently inefficient, so they made certain decisions to improve efficiency over time. On the consumer banking side, they have made progress in cleanup, efficiency, and digital migration but still have a long way to go.
Matthew O’Connor of Deutsche Bank mentioned concerns about the trading business, as highlighted in a New York Post article, and asked how the bank is growing its trading businesses responsibly while ensuring proper risk management and oversight.
Wells Fargo CEO’s Charles Scharf expressed confidence in the business and stated they are not increasing risk meaningfully. He highlighted that the company has strong financial risk management and oversight in the trading businesses, which focus on customer flow. He advised caution in relying on third-party sources and emphasised that they feel good about the company’s progress and performance.
Betsy Graseck of Morgan Stanley inquired about comparing deposit betas in the current and previous cycles.
Wells Fargo CFO’s Michael Santomassimo explained that it would be different due to the length of time rates staying higher. Betas have performed well relative to the last cycle, especially considering how much rates have increased. Betas vary across portfolios, with high betas on the large corporate side and lower betas on the commercial and consumer sides. The large corporate side should remain consistent, while the consumer side will depend on various factors.