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Wells Fargo Sees Brighter Days for US Consumer Spending

The opening week of first-quarter earnings season was billed as a referendum on the state of the U.S. economy, specifically consumer spending.

While Wells Fargo didn’t post stellar earnings Friday (April 12) it did vote “yes” on the economic prospects for the balance of 2024.

“We continue to see strength in the U.S. economy,” CEO Charlie Scharf said during the company’s earnings call. “Spending patterns and consumers using our debit and credit cards remain generally consistent and continue to grow year over year. Consumer credit is performing as well as expected, and wholesale credit continues to perform well. And our views around commercial real estate have not significantly changed since last quarter. These are all positives. In addition, we remain committed and confident in our ability to increase efficiencies across the enterprise. And areas we have targeted for investments, such as credit card investment, banking and trading, are performing well.”

By the numbers, Wells reported an 8% decrease in net interest income compared to the same period in 2023. This decline was largely attributed to increased funding costs, spurred by heightened interest rates that prompted customers to switch to higher-yielding deposit products. A reduction in loan balances further pressured net interest income, although this was somewhat mitigated by higher yields on earning assets.

On the other hand, noninterest income jumped 17% during the quarter. This growth was primarily fueled by stronger performance in Wells’ venture capital business, which experienced lower impairments. Other contributors included an uptick in investment banking fees, increased asset-based fees within Wealth and Investment Management owing to higher market valuations, and elevated trading revenue in the markets business.

On the expenses front, noninterest expenses rose by 5%, driven by an increase in operating losses, which included customer remediation accruals for historical issues. Additionally, higher FDIC assessments, increased revenue-related compensation — particularly in Wealth and Investment Management — and rising costs for technology and equipment also contributed to the expense growth.

On the credit side, Q1 saw a reduction in the allowance for credit losses, particularly in commercial real estate and auto loans. This decrease was partially offset by an increased allowance for credit card loans, reflecting a nuanced adjustment to the bank’s credit risk assessment in response to evolving market conditions.

Scharf also took the occasion of the Q1 earnings call to amplify the Office of the Comptroller of the Currency’s decision in February to lift a consent order from September 2016, which was related to the bank’s well-publicized sales practices misconduct. The order was originally linked to the fake accounts scandal of 2016, where it was discovered that employees had created unauthorized accounts to artificially boost sales metrics.

“The closure of this order is an important step forward and is confirmation that we operate much differently today around sales practices,” Scharf said, noting that the termination represented the sixth regulatory enforcement action closed against Wells Fargo since 2019.

Scharf emphasized the ongoing priority of the bank to address remaining risk and control issues until all necessary reforms are fully implemented. But his comments came with a warning.

“Regulatory pressures on banks with long-standing issues such as ours is high, and until we complete our work and until it is validated by regulators, we remain at risk of further regulatory actions,” Scharf said. “Additionally, as we implement heightened controls and oversight, new issues could be found, and these may result in regulatory actions.”