Wells Fargo Earnings: Higher Expenses Weigh on Profits

The Wells Fargo Center in Charlotte, North Carolina. Photo credit: iStock/Thinkstock.

Despite an increase in revenue at Wells Fargo during the second quarter, pre-tax earnings fell as higher expenses offset $479 million more in net interest income.

The nation's fourth biggest bank by assets said on Tuesday that it earned $8.55 billion before taxes in the three months ended June 30 compared to $8.66 billion last year. It amounted to a 1.2% decline.

On a per-share basis, Wells Fargo's after-tax diluted earnings per share increased 2% to $1.03. This was higher than the $1.01 that the bank earned in the year-ago period, but it came up short of Wells Fargo's first-quarter earnings per share of $1.04.

As you can see in the chart above, the performance marked the fifth consecutive time that diluted earnings per share have risen during the second quarter at the California-based bank on a year-over-year basis.

"Wells Fargo's second quarter results reflected continued strength in the fundamental drivers of long term growth," said chairman and CEO John Stumpf. "Compared with a year ago, we grew loans, deposits and capital, and our balance sheet remained strong. Credit results also improved and we continued to adhere to our disciplined approach to risk management."

Revenue was the highlight of Wells Fargo's performance. For the quarter, net revenue grew by $252 million, or 1.2%, compared to the second quarter of 2014.

The increase was fueled by higher lending profits. Even though lower interest rates translated into depressed profits per dollar of interest-earning assets, Wells Fargo's net interest income still increased by $479 million, or 4.4%, thanks to the addition of $154 billion in productive assets.

Wells Fargo's mortgage business was the biggest beneficiary of low interest rates. Residential originations rose by 32% in the quarter, coming in at $62 billion.

Alternatively, fee-based income as a whole took a hit, falling by $227 million, or 2.2%, in the quarter. Lower trading profits were the primary culprit, as the majority of other noninterest income line items were up compared to last year.

Wells Fargo also set aside more money in anticipation of future loan losses than it did in the year-ago period, increasing its quarterly loan loss provision by $83 million, or 38.2%. To be clear, even the higher figure is within the expected range for a bank with more than $1.7 trillion in assets on its balance sheet.

Finally, breaking a trend that dates back to 2011, Wells Fargo's quarterly operating expenses rose 2.3% compared to the same period last year. This pushed its efficiency ratio up to 58.5%, from 57.9% in the second quarter of 2014. This means that it costs the bank roughly $0.56 to generate every $1 in revenue.

That being said, its current efficiency ratio is still within Wells Fargo's 55% to 59% target range. It was also an improvement over the first quarter's 58.8% ratio.

All things considered, despite the continued drag of low interest rates, Wells Fargo still cleared a 1.33% annualized return on assets for the quarter and a 12.7% return on common equity. Both figures are excellent at this stage in the business cycle. The latter figure, in particular, comfortably exceeds the 10% benchmark that generally dictates whether or not a bank's shares trade for a premium to book value.

Over all, the market took a favorable view of Well Fargo's results, pushing its shares higher in early morning trading.

The article Wells Fargo Earnings: Higher Expenses Weigh on Profits originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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