Wells Fargo: Beyond the significant regulatory constraints

by Finploris
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The year 2021 is almost over. But one thing is already clear: it was a good year for investors. The S&P 500 is up 23 percent so far. And the financial sector was one of the best performing segments. Wells Fargo’s share price, for example, rose by round about 60 percent.

The share price could also get new growth potential from rising interest rates in the USA. As a financial institution that is largely dependent on the traditional lending business, the interest rate level is the most important factor for higher profits.

But the scandal, which became public in 2016, is still having an impact. Employees had opened fake accounts to drive up sales. The CEO had to quit and Wells Fargo had to pay several penalties. Since then, management has been improving governance and compliance structures.

The strong capitalization will allow Wells Fargo’s management to return more than $18 billion to shareholders by share repurchases and dividends over the coming quarters.

The actions we’re taking to improve operating effectiveness and financial returns are coming through in our results, in addition to the benefits we’re experiencing from the economic recovery. We recorded a $1.7 billion pre-tax reduction in the allowance for credit losses and had strong equity gains. More importantly, charge-offs were low, net interest income stabilized and period-end loans grew for the first time since first quarter 2020. Expenses continued to decline as we made progress on our efficiency initiatives, and we increased our capital return to shareholders by repurchasing $5.3 billion of common stock and increasing our dividend.

CEO Charlie Scharf

Net interest income decreased 5%, primarily due to lower loan balances reflecting soft demand and elevated prepayments and the impact of lower yields on earning assets. Furthermore, noninterest income decreased slightly and included an increase in investment advisory and other asset-based fees primarily driven by higher market valuations, and improved results in affiliated venture capital and private equity businesses. 

On the contrary, noninterest expense decreased 13%, due to lower restructuring charges, operating losses, and occupancy expense. Additionally, salaries expense and consultant and contractor spend were lower due to efficiency initiatives. Provision for credit losses in third quarter 2021 included a $1.7 billion decrease in the allowance for credit losses due to continued improvements in the economic environment, as well as a significant decrease in net charge-offs.

In total, Wells Fargo reported for the third quarter a net income of $5.1 billion, or $1.17 per diluted share.

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