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For Wells Fargo (WFC) and its banking peers, higher interest rates have been a double-edged sword. On one hand, higher interest rates enable WFC to generate more interest income from its loan portfolio, but on the other hand, they're also causing its customers to migrate towards higher yielding deposit products. Accordingly, WFC's funding costs have increased, causing the company's net interest income (NII) to fall by 9% yr/yr to $11.9 bln, missing analysts' expectations.

• High interest rates also aren't helping WFC's home lending business, which saw revenue drop by 3% yr/yr to $823 mln as home affordability issues have put a lid on mortgage origination activity.
• Although expectations for the Fed to begin cutting rates this year shot higher in the wake of yesterday's cooler-than-expected June CPI report, WFC isn't anticipating a major shift in the business environment for the remainder of 2024, adding to investors' disappointment. 
  • The company still expects FY24 NII to fall in a range of down 7-9% on a yr/yr basis, although it believes the decline may land in the upper half of that range.
• In WFC's bread and butter Consumer Banking and Lending segment (43% of total Q2 revenue), revenue declined by 5% to $9.0 bln due to the aforementioned movement to higher yielding deposit products, creating a lower deposit base that's available for lending. Additionally, the auto lending business was significantly weaker than home lending, down 25% as consumers continue to shy away from making big-ticket purchases.
• On the positive side, WFC's Investment Banking and Markets businesses performed quite well. Thanks to a much more active IPO market compared to last year, Investment Banking revenue jumped by 38% to $430 mln. Meanwhile, a strong stock market helped fuel a 41% surge in equities trading revenue, pushing total Markets revenue higher by 16% to $1.8 bln.
  • That strong stock market also drove a 6% increase in WFC's Wealth and Investment Management segment as the company benefited from higher asset-based fees.
• From a credit quality standpoint, WFC is still in good shape as the provisions for credit losses declined by $477 mln yr/yr to $1.2 bln. However, there are some relatively minor cracks emerging in the company's commercial real estate portfolio.
  • WFC's total nonperforming assets grew by 5%, or $410 mln, driven by higher commercial real estate nonaccrual loans. As a percentage of average loans, commercial net loan charge-offs edged up to 0.35% from 0.25%.

Overall, Q2 was a bit of a mixed bag for WFC as the company managed to beat EPS expectations, but the effects from higher interest rates continued to linger, squeezing its margins and putting pressure on its home and auto lending businesses.