Wells Fargo’s Credit Growth Lags behind Peers’

Subdued performance

Wells Fargo’s (WFC) operating performance has been volatile since 2017, with no major growth. The bank has lagged behind major banking peers (XLF) in terms of credit growth and non-interest trading and advisory income. It has been grappling with compliance and fraud-related issues, costing it corporate clients. Wells Fargo has deployed strict underwriting guidelines on the lending front, slowing its balance sheet expansion.

Wells Fargo’s Credit Growth Lags behind Peers’

In the second quarter, Wells Fargo missed analysts’ EPS estimate of $1.12, posting EPS of $0.98 and marking a ~9% decline YoY (year-over-year). The earnings included a discrete income tax expense of $481 million. The bank’s net interest income grew 1% YoY to $12.5 billion during the quarter, helped by rate spread expansion. However, its credit book has declined sequentially in four of the last five quarters.

In comparison, JPMorgan Chase (JPM) and Bank of America (BAC) reported 4%–5% growth in the first quarter. Citigroup (C) followed with ~2% growth, helped by retail lending.

Trading and advisory income

Wells Fargo draws most of its trading income from debt-related offerings. The Fed’s hawkish monetary policy has led to withdrawals from debt-related offerings. The withdrawals due to rate hikes have been partially offset by concerns of higher equity valuation. Institutional investors have sold equities and invested in debt and alternatives recently. In the second quarter, its market-sensitive revenue fell YoY to $527 million from $1 billion due to impairments, lower gains from holdings, and lower trading revenue.

Wells Fargo’s mortgage banking has declined in recent quarters due to rising rates and the Fed’s hawkish monetary policy. In the second quarter, mortgage banking revenue fell YoY to $770 million from $934 million. Higher rates have led to prepayments from borrowers, lowering mortgage servicing income.