Wells Fargo shares rally 5% despite NII and revenue miss

Wells Fargo's Q3 results were mixed compared to analyst expectations. The bank's net interest income came in at $11.69 billion, slightly below the forecast of $11.88 billion, and revenue was $20.37 billion, just missing the expected $20.41 billion. Despite this, the company's EPS stood at $1.42, a positive figure that contributed to its performance in the market. Total average deposits were reported at $1.34 trillion, slightly below the estimate of $1.35 trillion, indicating some pressure on the deposit base.

On the positive side, Wells Fargo delivered a stronger-than-expected return on equity of 11.7% versus the anticipated 10.8%, and its return on tangible common equity came in at 13.9%, beating the 12.9% estimate. The Common Equity Tier 1 ratio also outperformed, at 11.3% compared to the expected 11.2%. Non-interest expenses were well-managed at $13.07 billion, slightly below the projected $13.19 billion, reflecting disciplined cost control despite challenges in the broader environment.

Net interest income declined by 11%, driven by higher funding costs as customers shifted to higher-yielding deposit products and changes in deposit mix and pricing, including increased rates on sweep deposits in advisory brokerage accounts. This decrease was partially offset by higher yields on earning assets despite lower loan balances. The 11% decline was worse than the projected 7-9% decline the company forecast at last month's Barclays Financial Services conference.

The provision for credit losses was a notable highlight, coming in at $1.07 billion, significantly lower than the expected $1.34 billion, suggesting better-than-anticipated credit performance. However, concerns were raised regarding the office portion of the commercial real estate market, with expectations for additional losses in that segment over time. Overall, while some metrics fell short of expectations, Wells Fargo's robust credit discipline, diverse revenue sources, and managed expenses helped offset these challenges, resulting in a stock that crossed to green in the market after initially trading lower premarket.

Commercial net loan charge-offs decreased to 0.24% from 0.35%, mainly due to lower charge-offs in commercial real estate and industrial loans. The consumer net loan charge-off rate also improved, falling to 0.83% from 0.88%, driven by reduced charge-offs in the credit card portfolio. Nonperforming assets declined by $266 million, or 3%, primarily due to lower nonaccrual loans in commercial real estate and residential mortgages. Overall, the credit issues facing the banking system appear to remain benign and near historical lows.

Consumer, Small and Business Banking revenue declined by 5%, impacted by lower deposit balances and customer migration to higher-yielding products, partially offset by higher deposit fees. Home Lending saw a slight increase due to higher mortgage banking fees, despite lower net interest income from reduced loan balances, while Credit Card revenue fell 2% as lower fee revenue offset gains from higher loan balances. Auto and Personal Lending segments were down 24% and 7%, respectively, due to lower loan balances and spread compression, while noninterest expenses decreased by 5% thanks to reduced operating costs and efficiency initiatives.

Wells Fargo shares have responded positively to the earnings results, rising from $57 to $60 in pre-market trading as investors are drawn to its relatively cheaper valuation compared to peer JPMorgan, which posted stronger results. Investors will be closely watching for any updates on the potential removal of Wells Fargo's asset cap during the company's earnings call later this morning.