Wells Fargo is set to release its third-quarter earnings report on Friday, offering valuable insight into how banks have been affected by the recent rise in interest rates and Treasury yields.
Analyst Expectations
According to a survey conducted by FactSet, analysts anticipate Wells Fargo to announce earnings of $1.24 per share, with revenue reaching $20.09 billion. Comparatively, in the same period last year, the bank reported earnings of 85 cents per share on revenue totaling $19.51 billion.
Anticipated Increase in Net Interest Income
Furthermore, analysts forecast an increase in net interest income for the quarter. It is estimated to reach $12.73 billion, surpassing last year’s $12.1 billion. This growth can be attributed to higher interest rates, which enhance the spread between what banks pay depositors and what they charge for loans. Notably, the Federal Reserve has raised interest rates 11 times as part of its strategy to combat historically high inflation.
Potential Impact of Rising Interest Rates
While earnings, revenue, and net interest margin are all expected to improve, concerns linger regarding the potential adverse effects of increasing interest rates on bank performance. Keefe, Bruyette & Woods analyst Christopher McGratty addressed this issue in a recent research note, stating, “The prospects of interest rates remaining higher for longer have recently pushed Treasury yields higher and bank stocks lower.” Consequently, Wells Fargo’s stock has seen a decline of 4.3% this year.
Challenges for Customers and Banks
Higher interest rates can present challenges for customers when it comes to repaying their loans. To address this potential issue, Wells Fargo, along with other banks, has increased its allowance for possible credit losses by $949 million during the second quarter.
Impact on Banks’ Bond Holdings
Investors will also be interested in understanding the effects of rising Treasury yields on Wells Fargo. Yields on 10-year and 30-year Treasuries have been steadily climbing, reaching their highest points since 2007. Given that banks hold a significant portion of their assets in bonds, higher yields would result in the devaluation of existing bonds.
Also Reporting on Friday
In addition to Wells Fargo’s earnings report, JPMorgan Chase (JPM) and Citigroup (CITI) are also scheduled to release their financial results on the same day.
Contact Angela Palumbo