Strategy

Wells Fargo Matches Estimates But Stock Falls

The bank's profit continues to be weighed down by low interest rates, with net interest margin falling to 2.86% in the second quarter.
Matthew HellerJuly 15, 2016

Wells Fargo said Friday its second-quarter earnings fell 3% from a year earlier as low interest rates continued to weigh on its profitability despite strong growth in lending.

Both profit and revenue matched analysts’ expectations but Wells Fargo shares dropped 2.5%, to $47.71, on the earnings announcement. The stock has declined about 12% since the start of the year.

Net income for the three-month period ended June 30 fell to $5.56 billion, or $1.01 per share, while revenue rose 4.2% to $22.2 billion. Total loans were up 8% to $957.2 billion as the bank expanded its lending in all its businesses.

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“Like its big bank peers, Wells Fargo has been challenged by a prolonged period of historically low interest rates, which only fell further in the second quarter,” Reuters said, noting that the revenue growth was not enough to offset increases in loan loss provision and other expenses.

Wells Fargo’s net interest margin, a measure of how profitably the bank can lend out its customers’ deposits, fell to 2.86% in the second quarter from 2.9% at the end of March, and 2.97% in the second quarter a year ago.

“It’s a huge number to offset,” Steve Goddard, chairman of investment firm London Co., told The Wall Street Journal. “It’s just really tough for banks overall right now. I don’t care how well-managed you are.”

As the Los Angeles Times reports, Wells Fargo is particularly vulnerable to low interest rates because it makes much of its profit from loans to individuals and businesses and does not have a significant trading or investment banking operation, unlike other major U.S. banks such as JPMorgan Chase.

Wells Fargo CFO John Shrewsberry said the bank saw mortgage and refinancing activity pick up in the wake of last month’s Brexit, which shook markets temporarily. In expectation of the continued low-rate environment, it purchased $38 billion in mortgage bonds and other securities in the second quarter, or more than seven times the amount it purchased in the first quarter, to try to realize a better return on its excess deposits.

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