Wells Fargo's earnings beat in the first quarter hinged in large part on strong trends in credit quality and expense control.
The bank's net charge-offs fell 13% from the first quarter of 2024 to $1 billion — the lowest quarterly number since the three months that ended Sept. 30, 2023, when its charge-offs totaled $850 million.
Net charge-offs amounted to 45 basis points of average loans, down from 50 basis points on March 31, 2024. The improvement in charge-offs was evident in both the bank's commercial and consumer loan books.
"When you look at credit performance, it's actually good across the whole portfolio," Chief Financial Officer Michael Santomassimo said Friday on a conference call with reporters.
While regulators, analysts and other industry insiders
Commercial real estate net charge-offs fell to $95 million, the lowest total in five quarters. "So it's actually quite a good outcome," Santomassimo said.
Nonperforming assets did inch up 4% to $8.2 billion on March 31. Wells' provision for credit losses totaled $932 million, which was roughly in line with the $938 million provision it reported for the first quarter of 2024.
Santomassimo said on a conference call with analysts that the allowance reflects lower levels of CRE loans. He added that Wells made "a modest adjustment to reflect potential economic weakness that could develop."
Though analysts nodded to the company's positive credit trend, some expressed concern that its provision may be set too low, given the significant levels of
"We were surprised that WFC released $100 million in reserves given the macro uncertainties," Saul Martinez, head of U.S. financials research for HSBC Global Research, wrote in a research note.
Pierre Buhler, a managing director at SSA & Company in New York, said that Europe is in a recession and the U.S. is "teetering on the brink" of one. With storm clouds seemingly gathering, Buhler would have liked to see Wells Fargo follow the lead of other big banks and reserve more, especially in its credit card business.
"I don't see their results completely reflecting that anxiety we see with the other banks," Buhler said.
In tandem with solid asset quality and scaled-back credit costs, Wells reported first-quarter net interest expenses totaling $13.9 million, a 3% drop on a year-over-year basis. Santomassimo attributed the reduction to "hundreds and hundreds of projects and initiatives across every part of the company."
"It includes everything from automating manual processes across different businesses, reducing real estate footprint, reducing third party spend with consultants and the like, just ensuring every part of the company is being as efficient and effective as they should be," Santomassimo said.
"They did a good job on the overhead ratio," Buhler said. "Clearly, they're controlling their expenses quite well."
Wells reported first-quarter net income totaling $4.9 billion or $1.39 per diluted share Friday. The consensus estimate called for earnings of $1.23 per share, according to Zacks Investment Research.
CEO Charlie Scharf termed the company's results "solid," adding that he was "excited about the momentum we are building across our businesses."
Analysts and investors, however, were less impressed with Wells' revenue, which ended the quarter down 3% from a year ago at $20.1 billion. Observers had been expecting a result closer to $20.8 billion, according to Zacks.
A total of 11 consent orders between Wells Fargo and its regulators have been terminated since 2019, including five during the first quarter. Wells remains subject to a $1.95 trillion asset cap, though some analysts and investors have voiced hope that the cap might be lifted sometime in 2025.
Exiting the cap "would give the organization tremendous freedom to decide where and how they would grow as a bank," Buhler said. "I was hoping they would be out of it by now, but they will be out of it, hopefully, by the next quarter."
