Rising assets, rates stabilize wealth management at Wells Fargo

The rising stock market is a boon to wealth management businesses, and Wells Fargo & Co. reported a 9% increase in total client assets at the end of June, to almost $2 trillion, when compared to the same period a year earlier.

The S&P 500 stock index shot up 15.9% for the first half of the year, the best performance for the first six months of the year since 2019, according to CNBC.com. That benefits firms like Wells Fargo that have large wealth management operations because they calculate client fees for the next three months based on how the previous quarter closes.

And as expected, rising interest rates helped stabilize the second-quarter revenue of Wells Fargo & Co.'s wealth management and brokerage group, as well as earnings across the giant bank's variety of business lines.

At the bank's wealth and investment management group, which includes roughly 12,000 financial advisors, net interest income rose in the second quarter to $1 billion, an increase of 10% when compared to the same quarter last year. Earnings for noninterest income fell by 5% to $2.64 billion over the same period of time as a result of "lower asset-based fees driven by a decrease in market valuations," according to the bank.

Wells Fargo reported second-quarter earnings per share of $1.25, ahead of analysts' estimate of $1.10, said Steven Chubak, managing director of Wolfe Research. The earnings "beat" was driven by better net interest income and expense control, as well as lower minority interest, "which more than offset higher credit costs," according to a research note by Chubak.

Total revenue at wealth and investment management for the quarter was $3.65 billion, which is down 2% compared to the same period last year. The wealth management group made up roughly 18% of the bank's total revenue for the quarter of $20.5 billion.

Broker-dealers get some cushion thanks to rising interest rates, which provide firms with more profit from cash held in client accounts, margin loans used to buy more securities and banking activity in general. The fed funds rate has risen from essentially zero in January 2022 to 5% in June.

On a conference call Friday morning with senior management and analysts, including CEO Charles Scharf, discussion of Wells Fargo’s wealth management operations took a back seat to detailed discussions of the bank’s commercial real estate portfolio and expectations around interest rates and their impact on financial results.

“We had solid results in the quarter," Scharf said. "The revenue growth reflected strong net interest income growth, as well as higher non-interest income."

The bank is maintaining a close analysis of its commercial real estate portfolio, he noted.

Some commercial real estate investors are particularly skittish at the moment given the combination of rising interest rates, which make potential real estate deals more expensive, and fewer people going to the office in the post-Covid 19 work culture.