Joining the Q3 roster of banks that beat yet which all surprised investors with a cautionary red flag (for the other banks this involved a drop in FICC trading revenue and a sharp increase in loan loss reserves), moments ago Wells Fargo also reported better than expected Q3 EPS of $1.04 (exp. $1.03) which however was the result of a material 20 cent litigation accrual addback to a GAAP EPS of $0.84, indicating that management is expecting significant lawsuits in the coming months. Worse, the bank missed badly on the top line (revenue of $21.9bn vs exp. $22.4bn), but the reason why the stock has tanked by over 3% pre market is the unexpected miss in the company's Net Interest Margin, which slumped from 2.90% to 2.87%, well below the 2.92% expected, and resulting in a lower sequential Net Interest Income number of $12.476 billion.
Not helping matters is that the company's mortgage loan pipeline once again took a sharp leg lower. While total originations in Q3 rose to $59 billion sequentially (and down 16% Y/Y), what was more disappointing was the 27% Y/Y drop in Mortgage Applications, which declined to $73 billion in Q3, while the Mortgage Application pipeline, the most informative advance look at the state of the housing market, tumbled 42% to just $29 billion, which was just shy of lowest prints since the financial crisis.
However, while the bank's ongoing mortgage pains - traditionally the bread and butter for the largest US mortgage lender - was disappointing, if not exactly surprising for a bank that has seen scandal after scandal in recent months, there was a flashing red light elsewhere: following the sharp plunge last quarter, Wells reported that the decline in auto loan originations continued, tumbling 47% Y/Y to only $4.3 billion, the lowest print since the bank started disclosing this item back in 2013.
The lack of loan origination hit Wells at the bottom line, with total average loans $951.9 billion, down $5.5BN q/q, as a result of "lower commercial real estate and commercial & industrial loans" offset by "consumer loans up $201 million as growth in real estate 1-4 family first mortgage loans and consumer credit card was largely offset by the continued decline in auto on tighter credit underwriting standards, as well as continued paydowns in junior lien mortgage loans."
As for the ongoing slide in auto loan, Wells blamed "tighter credit underwriting standards", which if accurate is ominous for the broader auto sector which is now facing not only surging delinquencies primarily among subprime borrowers, but according to Wells, is about to get squeezed "bigly" on the supply side. It also means that auto sales in the coming quarters, already poor, are about to suffer an even sharper decline, pressuring not only overall US debt-funded consumer spending but also manufacturing production among the auto suppliers and downstream sectors, with adverse consequences for the broader economy.
Source: Wells Fargo