Wells Fargo & Co. reported a drop in fourth quarter profits on Friday due to one-time charges, but the bank remains upbeat about economic conditions and consumers. Wells Fargo’s results kicked off big bank fourth quarter earnings season, setting the tone for other major banks like JPMorgan Chase, Citigroup and Bank of America reporting next week.
Profits Fall On One-Time Charges
Wells Fargo reported a profit of $2.86 billion, or 67 cents per share, for the October-December period. That’s down from $5.8 billion, or $1.38 per share, in the same period a year earlier. The results missed Wall Street forecasts, but much of the decline was due to one-time charges related to legal matters in Wells Fargo’s mortgage lending business and regulatory requirements.
The San Fransisco-based bank, the third-largest in the U.S., took $3.3 billion in charges related to a 2013 settlement with the Federal Housing Finance Agency over mortgage-backed securities sold to Fannie Mae and Freddie Mac. There was another $642 million charge for customers affected by issues in Wells Fargo’s auto and mortgage lending operations.
| Quarter | Profit (Loss) | Earnings Per Share |
|---|---|---|
| Q4 2023 | $2.86B | $0.67 |
| Q4 2022 | $5.8B | $1.38 |
Excluding one-time charges, Wells Fargo posted an adjusted profit of $3.4 billion for the quarter.
Management said that if it weren’t for these charges, earnings would have been up from a year earlier thanks to cost cuts and bonuses at the end of last year being down sharply from 2021.
Loans And Revenue Drop, But Margins Improve
Wells Fargo’s total revenue in the fourth quarter came in at $19.66 billion, down from $20.86 billion a year earlier and below analysts forecasts. The decline was due to lower net interest income from falling loan balances as well as reduced fees due to lower mortgage lending.
However, the bank saw higher net interest margins compared to last year. This is an important metric measuring the difference between interest income generated and interest paid out to lenders. Wells Fargo’s margin rose to 2.91% from 2.73% in the year prior. This signals the bank is getting better rates on its loans.
To offset revenue declines, Wells Fargo is cutting costs including trimming staff and, reducing office space. Expenses were $15.30 billion in the quarter, down 12% from a year ago and $1 billion less than the third quarter.
Economic Outlook Remains Optimistic Despite Challenges
In a statement, Wells Fargo CEO Charles Scharf acknowledged it is still “an extremely complex economic environment with dynamics that can change quickly.” However, the bank expressed optimism on the overall U.S. economy.
“The job market remains exceptionally strong with very low unemployment and companies continue to add jobs and raise wages,” said Mike Santomassimo, Wells Fargo’s CFO during an earnings call. “Consumer spending has also been quite resilient.”
The bank noted credit losses have remained low and consumer credit performance has been strong. Wells Fargo believes higher credit losses are coming but wouldn’t speculate when that might happen.
There are warnings signs on the horizon though, including high inflation, rising interest rates, stock market volatility and global tensions that could eventually take a toll on economic growth.
Wells Fargo economists see GDP growth slowing to just 0.2% by the second quarter with higher odds of a mild recession. However, the overall 2023 outlook is still more positive than negative.
“We continue to see resilient consumers that are still spending excess cash and savings that they accumulated during the pandemic,” said Santomassimo.
Stock Falls On Mixed Results
Wells Fargo stock initially rose after it reported fourth-quarter earnings, signaling investors were focusing more on the bank’s optimistic outlook rather than profit declines.
Shares closed up 0.6% on Friday afternoon. But after executives laid out more details on the quarter during an earnings call, the stock fell in after-hours trading. Wells Fargo stock was recently down about 2.3% from its closing price.
The mixed reaction shows investors balancing the bank’s long-term growth potential against ongoing regulatory burdens and unresolved scandals still haunting Wells Fargo.
Earlier this week the Office of the Comptroller of the Currency (OCC) hit Wells Fargo with more regulatory oversight, citing “deficiencies” in governance, risk management and other areas. This will likely restrict Wells Fargo’s efforts to boost profits compared to competitors in 2023.
What’s Next For Wells Fargo
All eyes now turn to other major U.S. banks reporting earnings next week, including JPMorgan Chase, Citigroup and Bank of America to see if the trends Wells Fargo saw in the fourth quarter are industry wide.
Further out, Wells Fargo aims to eventually lift an unprecedented asset cap imposed by the Federal Reserve in 2018 stemming from fake accounts opened without customer permission. That will be key for Wells Fargo to significantly grow profits again.
There will surely be more scrutiny on Wells Fargo’s profits and management strategies throughout 2023 even as the bank tries to turn the page on multiple scandals.
Wells Fargo continues working to rebuild customer trust and its reputation while also positioning itself to benefit from higher interest rates going forward. It will likely be a turbulent year, but the bank sees a path through the headwinds.
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