Subdued performance

Wells Fargo & Company’s (WFC) operating performance has remained mostly stagnant since 2017, with no significant growth. The bank’s credit growth and non-interest trading and advisory income have lagged its major banking peers’ (XLF).

Since 2016, WFC has been grappling with fraud- and compliance-related issues, which has resulted in its losing several corporate clients. To counter these issues, the bank has deployed strict underlying guidelines on the lending front. However, more stringent rules and guidelines have slowed its balance sheet expansion. The bank’s credit book has declined sequentially in four of the last five quarters.

Wells Fargo’s Quarterly Results Lagged Its Top Peers’

Wells Fargo’s second-quarter EPS of $0.98 fell ~9% YoY (year-over-year) and missed analysts’ consensus estimate of $1.12. Its quarterly earnings included a discrete income tax expense of $481 million. Its net interest income of $12.5 billion marked a 1% YoY improvement mainly driven by rate spread expansion.

In comparison, Wells Fargo’s top peers JPMorgan Chase (JPM), Citigroup (C), and Goldman Sachs (GS) reported YoY rises of ~34%, 27%, and 51%, respectively, in their second-quarter EPS.

Trading and advisory income

Wells Fargo draws most of its trading income from debt-related offerings. However, the Fed’s hawkish monetary policy has led to withdrawals from debt-related offerings, thereby hurting the company’s trading revenues.

Nonetheless, the withdrawals due to rate hikes have been partially offset by concerns related to higher equity valuation, which have led institutional investors to offload equities and invest in debt and alternatives recently. In the second quarter, Wells Fargo’s market-sensitive revenue fell YoY to $527 million from $1 billion due to impairments, lower gains from holdings, and lower trading revenue.

Furthermore, the company’s mortgage banking revenue has fallen in recent quarters due to rising interest rates. Higher rates have led to prepayments from borrowers, lowering mortgage-servicing income. In the second quarter, its mortgage banking revenue fell YoY to $770 million from $934 million.

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