Wells Fargo’s wealth management arm is reaping profit from the Fed’s rate hikes

April 18, 2022 4:29 PM

Despite a slowing economy and interest rate hikes, Wells Fargo is reaping growing profit from its wealth management arm.

The San Francisco-based firm reported $465 million of net income from its Wealth and Investment Management segment, an 11% year-over-year increase in the first quarter, according to Wells Fargo’s April 14 earnings report. Net interest income reached $799 million, a 22% increase from a year ago.

The company said its rising income was driven by the impact of higher interest rates, as well as higher deposit and loan balances.

“While we will likely see an increase in credit losses from historical lows, we should be a net beneficiary as we will benefit from rising rates,” CEO Charlie Scharf said in the company’s April 14 earning call, according to a transcript by the investing website Seeking Alpha. “We have a strong capital position, and our lower expense base creates greater margins from which to invest.

“The rate increase currently included in the forward rate curve would also drive stronger net interest income growth than we anticipated earlier in the year,” he added.

Scroll down to see more takeaways from the company’s earnings report.

Rising revenue with increasing loans and deposit balances

The company’s wealth and investment management division earned $3.75 billion in the quarter ended March 31, a 6% gain from a year ago. The rise is primarily due to higher asset-based fees driven by an increase in market valuations and higher net interest income as a result of higher interest rates, as well as an increase in deposit and loan balances.

Wells Fargo reported $185.8 billion in deposits in the quarter, a 7% increase year over year. Average loans rose 5% from a year ago to $84.8 billion, driven by continued momentum in securities-based lending. It earned investment advisory and other asset-based fees of $2.48 billion, a 7% year-over-year increase.

Downsides of rate hikes

Despite the benefit from rising interest rates, Scharf also mentioned downsides.

“It's important to note that the benefit from rising rates is not linear, and we would expect deposit betas to accelerate after the initial rate hikes and customer migration from lower-yielding to higher-yielding deposit products would also likely increase,” he said.

Higher rates will also have a negative impact on mortgage volumes and potentially on market-related fees in corporate and investment banking, private equity,venture capital businesses and in wealth management, according to Scharf.

Mike Santomassimo, chief financial officer of Wells Fargo, said in the earning call that the company has pushed away some of the most interest rate-sensitive deposits in the last few years. “And so, that’s definitely going to help lower the average betas that we’ll see relative to what we saw in the last cycle,” Santomassimo said.

Fewer financial advisors, more assets

In the first quarter, Wells Fargo cut 117 from its ranks of financial and wealth advisors, dropping to 12,250, a 1% decline from the last quarter. Year over year, Wells Fargo has seen its wealth management arm shrink by 8% from the 13,277 advisors it rang in 2021 with. But fewer advisors will manage more assets now, as the total client assets climbed 1% from a year ago to $2.08 trillion. Annualized revenue per advisor climbed 15% from a year ago to $1.22 million.

Increasing expense under inflationary pressure

Despite growing earnings, the company is grappling with rising expenses as noninterest expenses increased 5%, primarily driven by higher revenue-related compensation. “Our own experience here is that the wage pressures that we’ve seen today are not as great as they were in the fourth quarter of last year. So they still exist, but they do seem to be slowing,” Scharf said.

“Even if you start to see a little bit of pressure on those line items, the growth in net interest income will position us pretty well throughout the rest of the year,” said Santomassimo.