Wells Fargo Reports Another Disappointing Quarter: Interest Income Tumbles Again As Expenses Mount

After the stellar results from both JPM and Goldman, we got the now traditional disappointment from Wells Fargo which reported Q1 earnings that were mixed at best.

The bank reported Q1 total revenue of $18.063BN, beating estimates of $17.5BN, with EPS of $1.05 also stronger than the 0.70 expected, and while CEO Charlie Scharf said that “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency" he cautioned that "low-interest rates and tepid loan demand continued to be a headwind.”

The good news: at least Wells revenues beat expectations, not something it can say for its previous quarters:

Sure enough, as with JPM, there were a number of asterisks here: the bank's net income of $4.74 billion was boosted by a larger-than-expected release of loan-loss reserves. To wit, the $1.6 billion reduction in the allowance for loan losses “reflected an improving U.S. economy," and “due to continued improvements in the economic environment and lower net charge-offs,” the bank said.

Also of note, net of $523MM in charge offs (a 0.24% charge off ratio), Wells loan loss provision declined by $1.048BN, a huge boost compared to the $121MM estimate.

Additionally, the bank's effective income tax rate was just 6.4%, which "included net discrete income tax benefits related to closing out prior years’ tax matters."

Things were especially ugly in net interest income, which tumbled a whopping 22% to $8.8BN from $11.3BN as "interest rates were a drag" and the impact was felt across the company’s businesses: consumer, commercial and corporate, and investment banking.

Commenting on this ongoing decline in Net Interest Income, the bank blamed it on lower rates even though rates actually jumped substantially in Q1.

  • Net interest income decreased $2.5 billion, or 22%, YoY reflecting the impact of lower interest rates, which drove a repricing of the balance sheet, lower loan balances due to soft demand and elevated prepayments, as well as unfavorable hedge ineffectiveness accounting results, and higher mortgage-backed securities (MBS) premium amortization; 1Q21 MBS premium amortization was $616 million vs. $361 million in 1Q20 and $646 million in 4Q20
  • Net interest income decreased $477 million, or 5%, from 4Q20 reflecting 2 fewer days in the quarter, unfavorable hedge ineffectiveness accounting results, continued repricing of the balance sheet, and lower loan balances
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