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Wells Fargo Investment Banking, NIMs, Holdings Help Expansion

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Interest margins

Wells Fargo (WFC) commands higher net interest margins (or NIMs) among its banking peers (IYF). Although the bank’s margins rose until 2Q17, they have declined by 6 basis points over the past couple of quarters, reflecting marginal contraction. JPMorgan Chase (JPM) commands NIMs above 2.5%, whereas Bank of America (BAC) and Citigroup (C) command slightly lower NIMs.

The Federal Reserve has increased interest rates since December 2015, which helped banks improve their NIMs. It is targeting at least three rate hikes in 2018, which can help banks maintain NIMs if not further improve them from their current levels.

Wells Fargo (WFC) posted net interest income of $12.3 billion in 4Q17, reflecting a sequential and YoY (year-over-year) decline mainly due to lower outstanding book. The numbers were also impacted by a one-time expense of $183.0 million due to the Tax Cuts and Jobs Act.

Excluding this impact, Wells Fargo posted similar numbers on a quarter-over-quarter basis. Credit offtake is expected to be a key driver for higher net interest income in the upcoming quarters of 2018.

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Net interest margins

Wells Fargo reported a NIM of ~2.8% in 4Q17 compared to ~2.9% in 4Q16. The margins declined by 3 basis points primarily due to the Tax Cuts and Jobs Act. However, NIMs can rebound in 1Q18 on higher interest rates and lower spending.

The Tax Cuts and Jobs Act impact was partially offset by lower long-term debt and repricing of existing outstanding book.

Non-interest income

Wells Fargo’s non-interest income also saw a reversal in 4Q17 with an increase to $9.7 billion compared to $9.4 billion in 3Q17. The bank’s investment banking revenues and portfolio holdings saw appreciation, partially offset by weaker mortgage banking and deposit service charges.

Mortgage banking slipped 35.0% in 4Q17 on a YoY basis as well as 11.0% sequentially, reflecting a subdued real estate market.

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