Wells Fargo shares drop as guidance disappoints

Wells Fargo reported second-quarter earnings and revenue that exceeded Wall Street expectations. The bank recorded $11.92 billion in net interest income, a 9% year-over-year decline and below the $12.12 billion expected by analysts. The drop in net interest income was attributed to the impact of higher interest rates on funding costs. Despite this, Wells Fargo reported earnings per share of $1.33 versus the expected $1.29 and revenue of $20.69 billion versus the expected $20.29 billion. Shares of Wells Fargo fell nearly 7% in Friday’s trading following the announcement. CEO Charlie Scharf said, “We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income. The investments we have been making allowed us to take advantage of market activity in the quarter with strong performance in investment advisory, trading, and investment banking fees.” Net income dipped slightly to $4.91 billion, or $1.33 per share, from $4.94 billion, or $1.25 per share, during the same quarter the previous year. The bank set aside $1.24 billion as a provision for credit losses, which included a modest decrease in the allowance for those losses. Revenue rose to $20.69 billion for the quarter. The bank repurchased more than $12 billion of common stock during the first half of 2024 and expects to increase the third-quarter dividend by 14%. The stock is up more than 22% this year, outperforming the S&P 500. This performance highlight comes amid a backdrop of rising interest rates and evolving market conditions, which continue to pose challenges for financial institutions globally.

Wells Fargo shares’ near-term challenges

Banks are investing in digital solutions and providing robust omnichannel experiences to meet the evolving needs of their customers and fend off competition from upstart competitors. Wells Fargo is increasing its investment in improving technology, including a new digital account opening experience. The bank has seen strong growth in mobile users, with active mobile customers up 6% from a year ago. Wells Fargo’s AI-powered virtual assistant, Fargo, has had nearly 15 million users and over 117 million interactions since its launch a year ago. Treasury management is emerging as a key focus area for both financial institutions and their customers. Wells Fargo is focused on growing its Treasury Management business, adding bankers to cover segments where it is under-penetrated, and delivering its investment banking and markets capabilities to clients. The company’s commitment to embracing digital investment and innovation may attract more small businesses. Wells Fargo’s progress in building an operational and compliance risk management framework is seen as foundational to its future growth. Despite surpassing quarterly expectations, Wells Fargo’s full-year guidance underwhelmed investors, sending shares down 7%. The bank expects full-year net interest income to fall 8% to 9% and raised its noninterest expense guidance by $1.4 billion to $54 billion. The near term could be choppy for Wells Fargo due to uncertainty about when the Federal Reserve will begin to ease up on rates and ongoing concerns about the health of the consumer and its impact on bank loan portfolios. However, for long-term-focused investors, Wells Fargo appears to have the wherewithal to handle future challenges.