Key Highlights

● Net Earnings were about $5.95 billion, up 6%.

● Noninterest expense edged lower and headcount fell by about 8% from a year before.

● The core Capital ratio eased to about 10% after heavy share retirement.

● The bank retired roughly $2.5 billion of stock in the quarter.

Wells Fargo & Company (NYSE:WFC) opened the major bank reporting season with a quarter in which earnings rose from a year earlier, expenses edged lower and the workforce kept shrinking, while the bank's core capital ratio slipped toward 10% as it retired a large amount of its own stock. Net earnings were about $5.95 billion, and Diluted Earnings per Share were $1.87.

The figures came with a mixed sequential picture. Compared with the second quarter, earnings, Revenue and per-share results were all lower, and the efficiency ratio worsened. Compared with a year earlier, they were higher, helped by Loan growth, a smaller cost base and discrete tax benefits. Chief Executive Charlie Scharf called the quarter one of broad-based growth, but he also pointed to higher interest rates, oil prices and Inflation as sources of economic uncertainty.

What did Wells Fargo report?

Net earnings of about $5.95 billion were up roughly 6% year over year and down about 7% from the second quarter. Diluted earnings per share of $1.87 were up about 13% from the prior year, a faster rate than total earnings because the share count has fallen. Total revenue was about $21.87 billion, up about 2% from a year earlier and down about 3% from the prior quarter.

ROTCE was about 16.3% and ROE about 13.8%. The release is labelled preliminary, as is standard for bank earnings statements issued before the full quarterly filing, so some figures may be adjusted slightly when the final report is submitted to the regulator.

The pattern against the second quarter deserves attention. In that quarter the bank had reported a stronger fee line and a lower efficiency ratio, so the third quarter faced a tougher comparison. A decline of several percent in earnings from a high point does not change the year-over-year direction, but it does mean that the third-quarter result is not simply a continuation of a rising trend, a nuance that headline coverage often skips.

How did interest and fee revenue compare?

Net interest revenue was about $12.52 billion, an increase of about 5% from a year earlier, supported by larger loan and deposit balances. Fee and other noninterest revenue was about $9.35 billion, down about 1% year over year and down about 9% sequentially.

The sequential decline in fees reflects several items. The company noted lower Venture Capital results and reduced Lease revenue after it exited its rail car leasing Business earlier in the year. Fee revenue can be uneven from quarter to quarter because of the timing of market-related gains, so the year-over-year comparison is the steadier guide.

Net interest revenue is the engine of the bank's earnings, and the 5% rise came despite deposit costs that remain elevated. Larger balances offset the pressure on margins. The bank's mix of lower-cost consumer and commercial deposits is a long-standing strength, and deposit growth of 11% indicates that customers have not moved large amounts of cash to higher-paying alternatives, at least not on a net basis.

Why did headcount fall by so much?

Noninterest expense was about $13.74 billion, down about 1% from a year earlier, and the release said headcount fell by about 8%. That is a large reduction for an institution with a workforce in the hundreds of thousands, and it follows a multi-year effort to simplify operations, automate processes and reduce layers of management.

Scharf has said in recent public remarks that the workforce is expected to keep shrinking as technology takes over routine work. The efficiency ratio, which compares expenses to revenue, was about 63%, better than the 65% of a year earlier but worse than the 60% of the second quarter, which had a stronger revenue base.

The reduction in staff also appears in the severance comparison. Because the prior-year quarter carried a large severance charge and this quarter did not report one of similar size, expense growth looks flatter. Management has indicated it will keep spending on technology and control functions even as the workforce shrinks, so savings in one area are partly redirected to others rather than flowing fully to the bottom line.

What happened to loans and deposits?

Average loans rose about 11% from a year earlier to roughly 1 trillion $30 billion, and average deposits rose about 11% to roughly $1 trillion $480 billion. Both are strong rates for a bank of this size and indicate that customers are borrowing more and keeping more with the bank.

Scharf pointed to consumer examples: more than 660,000 new Credit card accounts and auto lending originations about 15% higher than a year earlier. Growth in card and auto lending lifts interest revenue but also raises the amount of reserves the bank must set aside, a link that shows up in the credit section.

Loan growth in the double digits is notable for a bank that spent years under an asset limit imposed by the Federal Reserve after a sales practices scandal. With that constraint behind it, the bank has expanded in cards, auto lending and commercial credit. The speed of the growth also explains the build in reserves, since each new loan requires an upfront provision under current accounting rules.

What does the credit data show?

The provision for credit losses was about $1.03 billion, up from about $681 million a year earlier. Net charge-offs were about $983 million, or 38 hundredths of 1% of average loans, a little lower than the 40 hundredths a year before.

Nonaccrual loans were about $7.06 billion, or 67 hundredths of 1% of total loans, and nonperforming Assets fell by about $585 million from the previous quarter to 70 hundredths of 1% of loans. The allowance for credit losses was about $14.46 billion, or about 1.33% of loans. The higher provision therefore reflects loan growth and reserve building more than a deterioration in realised losses.

Consumer credit trends matter because cards and auto loans are the areas with the highest loss rates. The release shows net charge-offs slightly improved against a year earlier, which is consistent with the picture from other large lenders this month. Commercial real estate, a long-running area of concern for the industry, was not highlighted as a source of deterioration in the release, though the full filing provides more detail by loan type.

Why did the capital ratio decline?

The preliminary common Equity Tier one ratio was about 10%, compared with about 11% a year earlier and about 10.33% in the second quarter. The decline is mostly arithmetic. Loan growth of 11% raises weighted assets, and the bank retired about 28.5 million shares at a cost of about $2.5 billion in the quarter, which uses up capital.

A ratio near 10% is still above the minimum the bank must maintain, which includes a stress buffer set by the Federal Reserve. Management has said it prefers to run closer to its requirement than in the past, since it has a large surplus of capital after years of regulatory constraints. The lower ratio is thus a deliberate choice, though it reduces the cushion available if conditions worsen.

The ratio also matters for the bank's payout plans. With a lower cushion, the pace of stock retirement may slow, or the bank may rely on earnings growth to rebuild the ratio. Management has not announced any change. Market Participants will look for hints on the next call, and for the Federal Reserve's annual stress test results next year, which reset the buffer requirement for each large bank.

How did each segment perform for Wells Fargo?

Consumer Banking and Lending earned about $2.76 billion, up about a fifth. Commercial Banking earned about $1.2 billion, up about 3%. The corporate and deal-making banking segment earned about $1.92 billion, down about 2%. The Wealth and asset management segment earned about $603 million, up about 19%.

The Corporate line, which collects items not assigned to the businesses, showed a loss of about $526 million. Consumer lending carried the year-over-year improvement, while Wealth Management showed the fastest percentage growth from a smaller base. The mix indicates that the bank's earnings still lean on consumer credit and deposits more than on markets.

Corporate and deal-making banking earned slightly less than a year ago despite generally strong industry conditions, which fits the observation that the bank's markets activity is smaller than that of its largest peers. Commercial banking, serving mid-sized firms, grew modestly. The weaker contribution from these two units than from consumer lending shows where the bank sees its most productive growth, and where industry watchers see room for it to expand.

What one-time items affected the comparison?

Tax expense in the quarter included discrete benefits of about $170 million, which lifted earnings relative to a normal tax rate. A year earlier, the quarter included about $296 million of severance expense, which depressed the comparison base and helps explain why expenses fell even as the bank continued to restructure.

The sale of the rail car leasing unit in the first quarter of the year, which cut lease revenue, and weaker venture capital results were the other items called out. Readers comparing the quarter with earlier periods should adjust for these factors, since they do not reflect the repeatable earnings power of the core lending and deposit franchise.

What did Charlie Scharf say about the economy?

Scharf described the quarter as reflecting broad-based growth, higher earnings and stronger equity measures. He added that the company remains vigilant and named higher interest rates, higher oil prices and inflation as economic concerns. The language is similar to that of other large bank executives this month, who have praised resilient consumers while warning about prices and rates.

He did not provide a new numerical estimate in the release, and the release did not discuss the asset limit that once constrained the bank's growth. That constraint was a defining feature of the bank's recent history, and its absence from the text underlines how far the company has moved toward a normal growth footing.

Scharf's mention of oil prices is a reminder that energy costs feed through to consumer budgets and borrowing. When fuel prices climb, households may shift spending away from discretionary items and rely more on credit cards, which can raise delinquencies with a delay. The bank's reserve additions this quarter may reflect that caution, though the release does not give a breakdown of the provision by portfolio.

How does the bank sit within the wider industry?

Readers who follow Financial Stocks will see the pattern of a large lender with a strong consumer Franchise growing balances in a year of firm deposit growth. Wells Fargo has a smaller markets and advisory business than JPMorgan Chase, Goldman Sachs or Morgan Stanley, so its revenue depends more on net interest revenue and consumer fees.

That mix is part of why the sequential comparison weakened: markets-based revenue at some peers rose, while the bank's fee line fell. The stock is a member of the S&P 500, and its quarterly figures are often used by market participants as a read on American consumer and small business credit.

What should readers watch next for Wells Fargo?

Key points for the next report include whether net interest revenue keeps growing with loans, whether headcount reductions continue to lower expenses, how credit costs behave in card and auto lending, and where the capital ratio settles after further share retirement. The final report will also show whether severance and restructuring costs come back.

The bank's full quarterly filing contains more detail on segments and legal matters.