Wells Fargo & Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Wells Fargo is a diversified U.S. financial services company with four reportable operating segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.
Financial performance
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Total revenue | $20.729 billion | Up 17% year over year |
| Net interest income | $13.336 billion | Up 45% year over year |
| Noninterest income | $7.393 billion | Down 13% year over year |
| Noninterest expense | $13.676 billion | Down 1% year over year |
| Provision for credit losses | $1.207 billion | Compared with a $787 million benefit in Q1 2022 |
| Net income | $4.991 billion | Up 32% year over year |
| Net income applicable to common stock / diluted EPS | $4.713 billion / $1.23 | Compared with $3.509 billion / $0.91 |
| Net interest margin, taxable-equivalent | 3.20% | Compared with 2.16% |
| Efficiency ratio | 66% | Compared with 78% |
Revenue growth was driven mainly by higher net interest income as rates and average loan balances rose, and by stronger trading results. Net interest income growth was partly offset by higher deposit and long-term debt costs. Noninterest income was pressured by weaker mortgage banking, lower investment advisory fees, and losses on equity securities. Lower operating losses helped reduce expenses, partly offset by higher personnel expense.
Cash flow: Operating activities provided $7.406 billion, compared with $199 million in Q1 2022. Investing activities used $7.955 billion and financing activities used $2.177 billion. Cash, cash equivalents, and restricted cash declined $2.726 billion during the quarter to $156.431 billion.
Balance sheet, capital, and liquidity
- Total assets were $1.886 trillion at quarter-end, up slightly from December 31, 2022. Period-end loans were $947.991 billion, down 1% from year-end but up 4% year over year; deposits were $1.363 trillion, down 2% from year-end and 8% year over year.
- Average deposits fell 7% year over year. Customers moved cash into higher-yielding alternatives and continued spending. Average deposit cost rose to 0.83% from 0.46% in Q4 2022.
- Allowance for credit losses on loans was $13.705 billion, or 1.45% of loans, compared with $13.609 billion and 1.42% at year-end. Net loan charge-offs were $604 million, up from $305 million a year earlier.
- Nonperforming assets were $6.142 billion, or 0.65% of loans, versus $5.763 billion, or 0.60%, at year-end. The increase was driven principally by commercial real estate nonaccrual loans, particularly office.
- Total equity was $183.220 billion. The binding Standardized CET1 ratio was 10.81%, above the stated 9.20% requirement; TLAC was 23.34%, against a 21.50% minimum; and LCR was 122%, above the 100% minimum. The supplementary leverage ratio was 6.96%.
- Primary liquidity sources totaled $430.725 billion, including $398.242 billion unencumbered. Available borrowing capacity at the FHLBs and Federal Reserve Discount Window was approximately $219.1 billion; the company does not view Discount Window capacity as a primary liquidity source.
- Short-term borrowings increased to $81.007 billion from $51.145 billion at year-end. Long-term debt was $173.466 billion. Debt securities had $43.922 billion of combined net unrealized losses at quarter-end, attributed mainly to higher interest rates and credit-spread changes; 99% of the AFS and HTM portfolio was rated AA- or above.
Changes and segment performance
- Compared with Q1 2022, higher rates and loan balances lifted net interest income, while noninterest income declined. Trading gains were $1.342 billion versus $218 million a year earlier; mortgage banking income was $232 million versus $693 million.
- Commercial Banking revenue rose 42% year over year to $3.307 billion, and net income rose 40% to $1.196 billion, supported largely by net interest income and treasury management and payments revenue.
- Corporate and Investment Banking revenue rose 41% to $4.902 billion and net income rose 45% to $1.818 billion, reflecting higher trading results and net interest income. Investment banking fees fell 32%.
- Consumer Banking and Lending revenue rose 9% to $9.364 billion, but its provision for credit losses increased to $867 million from a $190 million benefit a year earlier. Credit card and auto losses increased.
- Wealth and Investment Management revenue declined 2% to $3.681 billion and net income declined 2% to $457 million, as lower advisory fees offset higher net interest income. Advisory assets were $825 billion, down 10% year over year.
Outlook, risks, and unusual items
- The filing provides no specific earnings, revenue, or expense guidance. Management’s interest-rate simulations estimated that an instantaneous parallel 100-basis-point increase would add $2.1 billion to net interest income over the next 12 months, while a 100-basis-point decrease would reduce it by $2.1 billion. These estimates depend on assumptions and exclude noninterest-income and expense effects.
- Management described ongoing work to strengthen risk and control infrastructure and comply with multiple regulatory orders. The Federal Reserve asset cap remains in place until specified plans and third-party reviews satisfy the FRB; compliance work is expected to take multiple years. Failure or delay could bring penalties, restrictions, or other consequences.
- The CFPB’s December 2022 consent order requires customer remediation and a $1.7 billion civil penalty. The company also disclosed ongoing remediation and litigation matters. The high end of reasonably possible legal losses in excess of accrued probable losses was approximately $1.4 billion at March 31; actual outcomes may differ and could materially affect results in a period.
- Credit risks include worsening commercial real estate conditions, especially office properties: office represented 23% of CRE loans, and criticized CRE loans increased. Credit card and auto charge-offs also rose. The allowance scenarios assume near-term economic contraction, higher unemployment, and declining property values; management cautions that additional losses may arise.
- The FDIC announced a special assessment to recover losses from recent bank failures. Wells Fargo said the amount was not yet reasonably estimable but expected FDIC assessment expense to increase. Q1 regulatory charges and assessments expense was $271 million.
- Accounting changes adopted in 2023 included ASU 2018-12, applied retrospectively, and ASU 2022-02. ASU 2022-02 reduced the opening loan allowance by $429 million pre-tax and increased retained earnings by $323 million after tax. ASU 2022-01 also led to a reclassification of $23.2 billion fair value of HTM securities to AFS.
- Wells Fargo repurchased 86.4 million common shares for approximately $4.0 billion during Q1 and declared a $0.30-per-share dividend. The board authorization had approximately 164 million shares remaining at quarter-end; future distributions remain subject to capital, regulatory, market, and other conditions.
Most important facts for investors to verify
- Whether net interest income growth persists as deposit costs rise, deposits migrate to higher-yielding products, and loan balances change.
- Credit trends in office and other CRE exposures, criticized and nonaccrual loans, consumer delinquencies, charge-offs, and allowance adequacy.
- The timing and financial impact of regulatory consent-order remediation, the Federal Reserve asset cap, customer remediation, and legal contingencies.
- Actual FDIC special-assessment costs and any other material regulatory or litigation charges.
- Capital, liquidity, and unrealized securities-loss developments, including the effects of interest rates and deposit flows.
- Effects of accounting adoptions and portfolio reclassifications when comparing results across periods.