Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Wall Street bank earnings, which kicked off on Tuesday, reveal a truth about volatility. Fluctuating asset prices are great for Wall Street trading desks but less so for businesses that need to make investment decisions, or consumers looking to make big-ticket purchases.
JPMorgan and Citigroup both reaped bumper gains from their bond and stock-flipping businesses during the second quarter. But Wells Fargo, the country’s fourth-biggest bank by deposits, relies more on traditional kinds of banking. It lowered its full-year interest income target, as loan growth remained muted.
The San Francisco-based lender said net interest income — the yield it gets from interest-bearing assets minus the cost of the liabilities such as deposits — is now expected to be little changed from last year, down from its previous guidance of up to 3 per cent growth.
Compared with its Wall Street peers, Wells Fargo has a relatively small investment banking and markets desk. The two divisions generated $8.7bn in revenue last year, or a bit less than 12 per cent of the group total. At JPMorgan, the $40bn of comparable revenue accounted for more than a fifth of its total.
Wells Fargo is unusual in another way, too. Last month, regulators lifted a seven-year ban on growing its assets above a certain level, imposed as punishment for various consumer-facing scandals. Now, Wells Fargo chief Charlie Scharf is theoretically free to pursue growth.
Based on how JPMorgan and Citi are faring, beefing up Wells Fargo’s trading and investment banking desks would be an obvious place to start. But poaching star traders and bankers does not come cheap. Scharf’s bank is still less efficient than rivals: costs ate up 64 per cent of revenue in the latest quarter, compared with just 52 per cent at JPMorgan.
He might do better to aim farther down the food chain: at the deposits and lending businesses of smaller regional banks. True, demand for loans remains subdued. Wells Fargo grew its loan book by less than 1 per cent year on year during the second quarter. But within that, commercial loans rose, helping offset weaker consumer mortgage and car loan demand.
One benefit from the lifting of the asset cap is that Wells Fargo can be more aggressive in attracting deposits from companies and consumers alike. Regional lenders, which also depend on the spread between deposit and lending rates, potentially have most to lose. A bigger balance sheet will also in turn allow Scharf to deploy more capital on trading activities.
Investors are betting that Scharf will put his new powers to work. Wells Fargo shares are up more than a third over the past year, and the stock trades at 1.6 times year-ahead estimated book value, according to LSEG, compared with the sector average of just over 1 times book. That’s not enough to spook a mega-lender like JPMorgan, which trades at 2.3 times book. But it should certainly make the minnows nervous.
