While rate cuts can boost borrowing and reduce deposit costs over time, they tend to pressure interest income in the near term.
Net interest income — the difference between earnings on loans and payments on deposits — came in at US$12.1 billion in the quarter, compared with analysts’ average estimate of US$12.3 billion, according to data compiled by LSEG.
NII has been a key focus in recent quarters as investors assess Wells Fargo’s progress in increasing its interest income after the Federal Reserve lifted its asset cap.
Shares of the San Francisco-based company fell 2.8% in premarket trading. The stock had slipped 7% this year as of Monday’s close.
Consumers spending more on gas
Wall Street banks face fresh challenges as the Middle East conflict pushes oil prices higher, raising fears of inflation that could keep interest rates elevated and weigh on growth. For Wells Fargo, which earns about 40% of its revenue from consumer banking, higher energy prices also mean consumers are paying more for gas on their credit cards.
Chief Financial Officer Mike Santomassimo said consumers were probably spending between 25% and 30% more on gas than they did before the conflict.
“But overall spend continues to be quite resilient and quite strong. We’re not seeing the overall spend level trends change really with any significance,” he told reporters.
Wells Fargo’s net profit was US$5.25 billion, or US$1.60 per share, compared with US$4.89 billion, or US$1.39 per share, a year earlier.
Analysts had expected a profit of US$1.58 per share in the quarter.
Rival JPMorgan Chase reported a 13% rise in first-quarter profit on Tuesday, as record gains in trading due to market volatility and a pickup in dealmaking lifted results.
Wells Fargo’s loan book surged 11% past US$1 trillion in the quarter, after limited growth under its seven-year asset cap.
The bank has aggressively increased its loan book by focusing on credit cards and auto loans, after the Fed lifted the US$1.95 trillion asset cap last year. That allowed the bank to expand its balance sheet and pursue stronger growth across businesses.
Private credit in spotlight
Wells Fargo had US$210.2 billion in loans to financial firms other than banks as of March 31.
Concerns around private credit have deepened in recent months, as negative headlines drew intense scrutiny to the asset class that has expanded rapidly over the past decade.
The high-profile bankruptcies of US auto parts supplier First Brands and car dealership Tricolor last year turned the spotlight on Wall Street banks’ exposure to non-depository financial institutions such as private equity and private credit managers.
“We’re quite comfortable with … the risk that we have in that underlying portfolio,” Santomassimo said.
Corporate debt finance portfolio – Wells Fargo’s secured lending to asset managers and most of its exposure to private credit – accounted for US$36.2 billion of loans.
Workforce continues to shrink
Wells Fargo cut headcount by 7% in the quarter, as CEO Charles Scharf focuses on streamlining its workforce, prioritising efficiency and cost cuts to fund long-term growth initiatives.
The bank had 200,999 employees at the end of March, compared with 205,198 as of Dec 31. Its headcount has fallen every quarter since late 2020.
Scharf said last year that Wells Fargo will keep trimming headcount as the bank focuses on becoming more efficient, adding that artificial intelligence presents a major opportunity to boost productivity.