Unlike JPM, which started off Q2 solidly, if with some weakness in loan creation, rapidly rising deposit costs, and a missing outlook page, Wells Fargo had an ugly second quarter, in which it missed on the top and bottom line, reporting revenue of $21.6BN down 3% Y/Y and down 2% Q/Q, missing expectations of $21.71BN, and EPS of $0.98, also below the $1.12 expected.
To be sure, there was some good news in the report: first Well said that its Net Interest Margin rose 9bps from 2.84% to 2.93%, the highest in over a year, and translating in Net Interest Income of $12.54BN, up from $12.471BN a year ago, even though the entire gain vs last year was solely due to one extra day in the quarter generating $80 million in revenue.
Additionally, the net charge-offs of $602 million, were down $139 million LQ: the $150 million reserve release reflected strong credit portfolio performance, as well as lower loan balances. Meanwhile, non-performing assets decreased $305 million Q/Q to $7.99BN as nonaccrual loans decreased $233 million as a $282 million decline in consumer real estate non-accruals was partially offset by a $46 million increase in commercial nonaccruals. Also good news: Foreclosed assets declined $72 million.
Alas, everything else in the report was ugly, starting with non-interest income which tumbled from $9.8BN to $9.0BN, largely as a result of trading gains which were down $52 million and included lower customer trading activity in equity products.
But far more concerning was the ongoing shrinkage in the company's balance sheet, as period-end loans declined from $947.3BN to $944.3BN, the lowest in years, and down $13.1 billion YoY driven by "declines in auto and legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgages, as well as lower commercial real estate loans."
There was a decline in period-end loan balances across the board with:
- Commercial loans down $291MM
- Commercial real estate loans down $2.5BN
- Commercial and industrial up $1.9BN
- Lease financing up $321MM
Consumer loans also declined $2.8BN q/q, as a result of:
- $1.9b decline in automobile loans (due to expected continued runoff)
- $1.4b decline in the junior lien mortgage portfolio as payoffs continued to exceed new originations
- $376m decline in other revolving credit, installment loans
- Decreases partially offset by: $581m increase in credit card balances; $343m increase in 1-4 family first-mortgage loans
Just as concerning was the ongoing slide in Wells deposits, which declined 3% or $36.9BN in Q2 to $1.268 trillion billion. This was driven by wholesale banking deposits down $23.6 billion, as well as consumer and small business banking deposits
of $754.3 billion, down $20.2 billion, or 3%.
And just as in the case of JPM, the rate Wells is paying on these deposits is rising:the average deposit cost of 40 bps was up 6 bps LQ and19 bps YoY.
Meanwhile, avg. deposits fell $25.8b q/q to $1.3t. The quarterly decline was driven by a decrease in commercial deposits, primarily from financial institutions, including $13.5b decline from actions WFC has taken in response to Fed’s asset cap.
And while CFO John Shrewsberry tried to reassure investors, saying that "net interest income grew both linked quarter and year-over-year in the second quarter, credit performance and capital levels remained strong, and we are on track to meet our expense reduction expectations." the market had different ideas and after the top and bottom line miss, the shrinkage in loans and deposits and and fears that the bank will have to shrink even more in response to the Federal Reserve’s asset cap imposed on Janet Yellen's last day, the stock of Warren Buffet's favorite bank is tumbling this morning, a glaring outlier to the rest of the banking sector.