Wells Fargo reported a decline in profits for the third quarter, primarily due to decreased interest income affected by weak loan demand and compressed interest payments.
The fourth-largest bank in the U.S. announced that its net income for the quarter ending September 30 was $5.11 billion, down from $5.78 billion during the same period last year.
The bank’s net interest income (NII) fell by 11% to $11.69 billion, falling short of analysts’ average estimate of $11.87 billion according to LSEG. NII represents the difference between interest earned from loans and interest paid on deposits.
Despite benefiting from interest income in recent years due to the Federal Reserve’s rate hikes, a continued decline is expected through the end of 2024.
Last month, the Fed lowered the benchmark policy rate by 50 basis points—the first reduction since 2020. Policymakers anticipate an additional half-point cut by the end of this year.
Following the rate cuts, top banks have reduced promotional loan rates, which could further diminish their interest income. Additionally, banks have tightened lending standards this year.
Looking ahead, several factors could put pressure on bank profitability. Elevated interest rates are dampening borrowing demand from both businesses and consumers. At the same time, banks are compelled to offer higher interest rates to attract deposits.
Reports indicate that Wells Fargo is actively working to lift the $1.95 trillion asset cap set by the Federal Reserve, which has hindered the bank’s growth potential until regulators determine the bank has adequately addressed issues stemming from the 2016 fake accounts scandal.
In September, U.S. banking regulators found the bank’s anti-money laundering and other illicit transaction safeguards to be insufficiently rigorous, limiting its ability to expand into high-risk business areas.
CEO Charlie Scharf indicated earlier this year that the asset cap restricts Wells Fargo’s capacity to absorb more deposits and expand its trading operations—two potential growth areas for the bank.
The bank remains under the constraints of consent orders related to eight regulatory penalties.
On a per-share basis, earnings for the quarter were $1.42, compared to $1.48 for the same period last year.
