Wells Fargo Beats Q2 Estimates but Cuts NII Outlook, Shares Slip 3%

Wells Fargo (WFC) delivered solid second-quarter results Friday morning, with earnings and revenue topping expectations and credit quality remaining stable despite macro uncertainty. However, the stock is pulling back approximately 3% in early trading as investors react to lowered full-year net interest income (NII) guidance and a "sell the news" response following strong recent performance. With the asset cap now lifted, Wells Fargo’s long-term growth runway looks clearer, but the near-term focus is shifting toward margin pressure and macro risks.

Wells Fargo reported Q2 EPS of $1.60, well ahead of the $1.41 consensus estimate. Net income came in at $5.49 billion versus estimates of $4.60 billion, while revenue grew 0.6% year-over-year to $20.82 billion, slightly above the $20.76 billion consensus. Return on equity (ROE) was 12.8%, and the bank’s CET1 capital ratio stood at 11.1%. Provision for credit losses totaled $1.01 billion, with net charge-offs of $1.0 billion. CEO Charlie Scharf struck a balanced tone, noting solid performance across segments and improved fee income trends, while acknowledging cautious client behavior tied to tariffs and interest rate uncertainty.

Net interest income declined 2% year-over-year to $11.71 billion, driven by lower interest rates on floating-rate assets and unfavorable deposit mix changes. On a sequential basis, however, NII rose 2% due to lower deposit costs, one extra day in the quarter, and higher securities yields and loan balances. The bank now expects FY2025 NII to be roughly flat with 2024’s $47.7 billion, a step down from its prior outlook for modest growth, due in part to softer performance in its Markets business.

Non-interest income rose 4% from the prior year to $9.1 billion. Gains included a $253 million benefit from acquiring full ownership of its merchant services JV, stronger investment banking fees, and higher asset-based fees within Wealth Management. Offsetting those gains were lower trading revenues in the Markets business, largely due to a tough YoY comp tied to a $122 million Visa share exchange gain in Q2 2024. Wealth and Investment Management segment revenues rose 1%, buoyed by market-driven growth in fees, while the segment’s non-interest expense rose 2% amid higher revenue-related compensation.

Credit quality held up well in Q2, easing investor concerns around consumer and commercial real estate risk. Total net loan charge-offs fell by $304 million sequentially to $1.0 billion, or 0.44% of average loans. Consumer NCOs improved to 0.81%, while commercial charge-offs edged higher to 0.18%. CRE loan charge-offs declined sequentially, primarily in the office segment. The allowance for credit losses rose modestly to $14.6 billion, and nonperforming assets declined 3% to $8.0 billion.

Wells Fargo maintained a strong capital position, with a CET1 ratio of 11.1%, up 11 basis points YoY. The firm returned $4.3 billion to shareholders in Q2 through $3 billion in buybacks and $1.3 billion in dividends. Management also announced plans to raise the Q3 dividend by 12.5% to $0.45/share, pending board approval. The bank’s liquidity remains robust, with a liquidity coverage ratio (LCR) of 121%, well above the regulatory minimum.

Non-interest expense for the quarter totaled $13.4 billion, up just 1% year-over-year, reflecting higher compensation in Wealth and tech investments, partially offset by cost efficiencies and lower operating losses. Management reaffirmed full-year noninterest expense guidance of $54.2 billion, unchanged from prior expectations. The efficiency ratio remained in line, supporting the bank’s long-term operating leverage goals.

Deposits averaged $1.3 trillion in Q2, down 1% YoY but up modestly QoQ. Loan growth was essentially flat YoY at $916.7 billion, with modest sequential gains led by commercial and industrial lending. Card balances rose 9% YoY, while auto and personal lending declined due to loan runoff and spread compression. CRE loan balances declined, but credit quality improved.

In segment results, Consumer, Small & Business Banking revenue rose 3%, driven by higher deposits and card lending. Home Lending was flat, with mortgage banking fees offsetting lower loan balances. Commercial Banking revenue fell 6%, pressured by NII headwinds. In Corporate & Investment Banking, revenue declined 3% YoY and 8% QoQ, with modest strength in advisory fees offset by weaker commercial real estate and trading activity. Markets revenue dipped 1% YoY and 3% QoQ.

Scharf emphasized that the lifting of the Fed-imposed asset cap marks a “pivotal milestone” for the bank, unlocking growth potential across lending, trading, and advisory services. Since 2019, the bank has seen 13 consent orders terminated, including seven this year. Wells Fargo now plans to expand its Markets business and credit card and wealth banking operations.

While the Q2 report was largely positive, the modest NII guidance cut and soft Markets performance weighed on sentiment. Investors may be taking profits after the stock’s strong run into earnings. That said, the fundamentals remain solid, and capital return continues to be a bright spot.

In summary, Wells Fargo’s Q2 results reflect a bank that is operating from a position of strength, even as it navigates a more cautious macro environment. Stable credit, strong capital, improving operational efficiency, and the removal of the asset cap set the stage for longer-term upside. But with NII expected to plateau and some trading headwinds lingering, the market is demanding more than “good” results this earnings season.

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