Please ensure Javascript is enabled for purposes of website accessibility

Wells Fargo Earnings Pressured by Low Interest Rates

By John Maxfield – Updated Oct 14, 2020 at 10:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wells Fargo's stock was down in early morning trading after the bank reported disappointing third-quarter earnings.

Shares of Wells Fargo (WFC -1.98%) were down in early trading after the nation's fourth-largest bank by assets reported third-quarter earnings that came up short of analyst estimates.

"Our third-quarter results reflect the impact of aggressive monetary and fiscal stimulus on the U.S. economy," said CEO Charlie Scharf. "Strong mortgage banking fees, higher equity markets, and declining sequential charge-offs positively impacted our results, while historically low interest rates reduced our net interest income and our expenses continued to remain elevated."

Wells Fargo earned $2 billion, or $0.42 per share, in the three months ended Sept. 30. That was less than half of its $4.6 billion profit in the same period last year, though it was up substantially from the second quarter of this year, when the bank reported a $2.4 billion net loss.

A bank facade.

Image source: Getty Images.

Like all banks, Wells Fargo's results were impacted by low interest rates. In March, the Federal Reserve dropped the federal funds rate to 0%. That lowers funding costs for banks, as all depositors can appreciate, but it also drives down the interest rate on loans. The net result is that banks are generating less net interest income from their portfolios of earning assets.

This trend is captured by the net interest margin, or NIM, which reflects a bank's net interest income as a percentage of its interest-earning assets. In Wells Fargo's case, its NIM came in at 2.13% for the third quarter, which was down from 2.25% in the second quarter of this year and 2.66% in the third quarter of last year.

Higher income from Wells Fargo's mortgage operation was one upside to lower interest rates. Despite the ongoing pandemic, home sales and refinancing activity continue at a brisk pace. Mortgage banking income at Wells Fargo in the third quarter was $1.6 billion, up from $317 million in second quarter of this year.

Wells Fargo's results were impacted as well by a handful of unique factors, including:

  • $961 million of customer remediation accruals
  • $718 million of restructuring charges
  • $452 million of noninterest income related to its securities portfolio

The operating environment for banks will continue to be challenging, as the Fed has said it will keep short-term interest rates at or near 0% through at least 2023. The upside for bank investors, however, is that many bank stocks are trading below book value.

In Wells Fargo's case, its shares are trading for a 37% discount to book value compared to an average discount of 5% on the KBW Bank Index. For long-term investors, that's hard to ignore.

John Maxfield owns shares of Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Wells Fargo & Stock Quote
Wells Fargo &
WFC
$45.94 (-1.98%) $0.93

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.