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Amid a tough climate for the banking industry in which high interest rates have pressured loan demand while also driving funding costs higher, Wells Fargo (WFC) still delivered a solid Q3 earnings beat. Keeping a tight lid on costs -- noninterest expenses were roughly flat yr/yr -- and setting aside less for potential credit losses were two key factors behind the better-than-expected EPS. Indeed, WFC's credit quality looks solid as total net loan charge-offs decreased by nearly 15% qtr/qtr to $1.11 bln.

Another important point to keep in mind is that WFC's stock has underperformed its banking peers in 2024, setting the stage for today's outperformance. Excluding today's gains, WFC is higher by 17% on a year-to-date basis, compared to a 25% gain for JPMorgan Chase (JPM), while Citigroup (C) and Bank of America (BAC) are up by 23% and 19%, respectively.

However, WFC's overall results and outlook were mixed, at best.

• Net interest income (NII), one of the most closely monitored metrics for banks, decreased by 11% to $11.7 bln, slightly missing analysts' expectations. Like last quarter, higher funding costs weighed on NII as consumers continued to migrate towards deposit products that offer higher yields such as promotional savings accounts and CDs.
• Sluggish loan activity compounded the issue. Average loan balances were down by 3% to $32.9 bln as that migration to higher-yielding products led to lower deposit balances that were available for lending. Furthermore, the elevated interest rate environment has dampened the housing market as reflected by the modest 2% increase in home lending revenue. The news is much worse for auto lending, which dove by 24% as consumers continued to shy away from making big-ticket purchases.
• Turning to the smaller Corporate and Investment Banking segment (24% of total revenue compared to 45% for Consumer Banking and Lending), total revenue was roughly flat on a yr/yr basis at $4.91 bln. The Investment Banking unit was a bit of a disappointment with revenue dipping by $11 mln yr/yr to $419 mln. Given the recent ramp-up in IPO and merger activity, we would have expected to see some growth here. 
• On the positive side, Markets revenue was up 6% yr/yr to $1.75 bln, driven by a 16% jump in FICC trading fees. Rate and structured products, in addition to municipals, saw strong trading activity during the quarter. The strength in FICC helped to offset a 24% yr/yr drop in equities revenue.
• Lastly, WFC's Wealth and Investment Management segment had a strong quarter as revenue climbed by 5% to $3.9 bln, driven by strength in the broader markets. However, the company did raise the interest rate that's paid out on some of its wealth management customers during the quarter, which played a role in the 16% yr/yr decrease in net interest income to $842 mln.

Overall, WFC executed well in a challenging business environment, but interest-rate-related headwinds are expected to persist in the near term. On that note, the company lowered its FY24 NII guidance, forecasting a drop of approximately 9%, compared to its prior outlook for a drop of 7-9%. Participants seem to be looking out further on the horizon, though, when lower interest rates next year help spur stronger demand for WFC's lending products.