Why Rate Hikes Help Maintain Wells Fargo’s Interest Spreads



Interest spreads

Wells Fargo (WFC) has maintained higher net interest margins or NIMs, helped by rate hikes and higher operating leverage compared to peers (IYF). The Fed raised rates again, by 25 basis points in March 2018, and it’s expected to deliver two to three more rate hikes this year. Rising rates have allowed banks to command higher spreads and improve operating margins.

Wells Fargo’s (WFC) NIMs declined by 6 basis points over the past couple of quarters, reflecting a marginal contraction. However, they’re expected to stabilize or rise marginally in 1H18, helped by the rate hike and partially offset by weak lending and a push for attractive rate offerings to new and existing clients.

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Rising yields across the industry

JPMorgan Chase (JPM) comes close to Wells Fargo’s 2.8% NIMs, managing a NIM above 2.5%. Bank of America (BAC) and Citigroup (C) saw slightly lower but improving NIMs in recent quarters.

Wells Fargo’s NII or net interest income declined to $12.3 billion, mainly due to lower lending activity and partially offset by a higher yield. Credit offtake is expected to remain weak at least for 1Q18, mainly due to lower taxes allowing corporates to generate higher cash flows.

Non-interest income

Wells Fargo’s non-interest income managed sequential growth to $9.7 billion from $9.4 billion in 3Q17. The bank managed higher fees through its investment banking services and asset management business, which were weakened by lower mortgage banking and service charges. The bank’s mortgage banking revenues declined by a steep 35% on a year-over-year basis, reflecting a weak real estate market affected by sentiment as well as rate hikes.


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