UPDATE 5-Wells Fargo profit beats estimates, cut to interest income forecast weighs on shares

Wells Fargo beat second-quarter profit estimates on Tuesday but cut its 2025 guidance for net interest income, dropping shares of the lender 3% in trading before the bell. The bank expects its interest income to be roughly in line with the 2024 level of $47.7 billion. In April, it said NII growth would be at the low end of the 1% to 3% range.

Wells Fargo said lower interest income in its markets business led to the NII forecast cut. Analysts and investors had been skeptical about its ability to meet its interest income targets after a slow start to 2025, as elevated interest rates weighed on demand from borrowers. "While there continue to be risks ... activity levels have remained consistent and our strong credit performance continues to point to the strength of our commercial and consumer customers' financial position," CEO Charlie Scharf said in a statement.

The bank had expected its NII, or the difference between what it earns on loans and pays on deposits, to be relatively stable in the first half of 2025, with more growth in the second half. Wells Fargo CFO Michael Santomassimo told a media briefing the lower NII outlook was driven by allocating more capital to markets businesses with low or no interest income.

Proposed tariff increases by President Donald Trump's administration on U.S. trading partners have caused some clients to be cautious about borrowing, Santomassimo said, but added there has been little impact on credit quality, or the borrowers' ability to repay debt. Wells Fargo's provision for credit losses fell to $1.01 billion in the quarter from $1.24 billion a year ago, helping profit grow in the second quarter.

The fourth-largest U.S. lender's net income was $5.49 billion, or $1.60 a share, in the three months ended June 30, it said on Tuesday. That compares with $4.91 billion, or $1.33 a share, a year earlier. Excluding one-time costs, the lender earned $1.54 per share compared with expectations of $1.41, according to estimates compiled by LSEG.

Investment banking fees rose 9% to $696 million in the quarter, driven by higher advisory fees. David Wagner, portfolio manager at Aptus Capital Advisors said Wells Fargo shares had reached a high valuation after they rallied this year.

"While we remain bullish on Wells Fargo's growth prospects and continued profitability improvement, we believe upside to its EPS (earnings per share) estimates is now appropriately reflected in its premium valuation, limiting near-term upside to WFC shares." DEFENSE TO OFFENSE

Last month, the U.S. Federal Reserve lifted Wells Fargo's seven-year-long $1.95 trillion asset cap, allowing the bank to pursue unimpeded growth. The bank exceeded that value of assets in the reported quarter. Wells Fargo has been focused on fixing its regulatory problems in recent years. While it labored under a $1.95-trillion cap asset cap, rivals expanded.

With the asset cap lifted and regulatory issues largely in the rearview mirror, Wall Street analysts expect Wells Fargo to attract more investor interest as its profits grow. "We now have the opportunity to grow in ways we could not while the asset cap was in place and are able to move forward more aggressively," Scharf said.

Santomassimo said the firm will allocate more capital to its markets business, while continuing to grow in areas of investment banking especially the middle market segment, and wealth business. "Of capabilities that we have there, investment banking across both the large corporate space and the middle market and commercial bank space should be an area of growth as well," he said. Santomassimo said investment banking activity has picked up late in the second quarter and in the third quarter.

"I think coming out of the end of the quarter into this quarter it certainly seems like volumes are picking up," he said. Wells Fargo is likely to beef up its wholesale businesses by adding market share in commercial banking, corporate and investment banking and trading, Scharf said previously.

He has said the bank will expand carefully. It has closed this year seven regulatory punishments, known as consent orders, and 13 since 2019. It still has one remaining consent order from 2018. "The asset cap removal is expected to take some time for benefits to ramp up and be effective at more aggressively growing NII," said Argus Research director of financial services research Stephen Biggar.

Wells Fargo had 212,804 employees as of June 30, compared with 215,367 at the end of March. Its headcount has fallen every quarter since late 2020.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)