Wells Fargo's asset cap is gone, but loan demand stays tepid

`
UPDATE: This story now includes commentary from Wells Fargo executives and analysts.

The regulatory shackles are off at Wells Fargo , but that new reality doesn't necessarily mean that rapid growth is in the offing. Though the bank's assets climbed above their longtime $1.95 trillion limit during the second quarter, Wells continues to be constrained by middling loan demand.

Chief Financial Officer Mike Santomassimo said Tuesday that the megabank expects full-year 2025 net interest income to total about $47.7 billion, in line with the 2024 total.

That forecast represents a reduction from earlier expectations, which called for spread-income growth of 1%-3% in 2025. The reduced guidance comes about six weeks after the Federal Reserve lifted the bank's seven-year-old asset cap.

Santomassimo pointed to "pretty tepid demand," especially in commercial lending, as the main reason for the weaker forecast.

"That's what's been sort of holding loan growth back," he told reporters during a call Tuesday. "As the go-forward economic picture continues to solidify, people have confidence they're going to have demand on the other side for their products, you'll see people borrow and continue to invest."

Wells did achieve some progress in its consumer-lending businesses, reporting growth in both credit cards and auto lending.

Auto lending revenue grew by $4 million, or 2%, in the second quarter to $241 million. It marked the first quarterly auto revenue gain since the fourth quarter of 2021, according to Santomassimo.

Credit card revenue, meanwhile, jumped 9% year over year, totaling $1.6 billion for the quarter.

At $917 billion, Wells' average total loans were level with the second quarter of 2024. Average total deposits of $1.33 trillion were down slightly.

Still, the removal of the asset cap, combined with a shrunken regulatory capital buffer, gives Wells Fargo wider latitude to invest in balance sheet growth. While continued weak demand limits the prospects for loan growth, Wells plans to intensify its deposit-gathering efforts.

"We expect to be more aggressive in our pursuit of consumer and corporate deposits," CEO Charlie Scharf said on a conference call with analysts. "We will selectively look to grow loans, though we will be cautious in times of economic uncertainty."

Scharf, who has spent most of his nearly six-year tenure dealing with the aftershocks of the bank's fake accounts scandal, said he believes the company is entering "an incredibly interesting" new phase.

"We're starting to see some loan growth. We're starting to see deposit flows. We've got new account openings. We've got expenses in check. Credit is performing well," Scharf said. "Those things all line up to be pretty exciting for the management team here."

During the second quarter, Wells reported net income of $5.5 billion, or $1.60 per share, which exceeded analysts' expectations of $1.41 per share, according to S&P Capital IQ. Earnings per share were up 20% from a year ago and 15% from the three months ending March 31.

The bottom-line growth was driven in large part by a substantial increase in noninterest income, which totaled $9.1 billion, up 4% from a year ago and 5% from the three months ending March 31. Net interest income of $11.7 billion was down 2% from a year ago, though it increased slightly from the first quarter.

The results followed regulators' announcement last month that they would lift the $1.95 trillion asset cap that had restricted the San Francisco-based bank's growth since 2018. Wells reported total assets of $1.98 trillion on June 30, up 2% from a year ago.

Wells' second-quarter earnings report also followed the Fed's July 2 decision to set the company's stress capital buffer for the year beginning Oct. 1 at 2.5%, well below the prior-year's 3.8% buffer. Following the Fed's announcement, Wells disclosed plans to increase its third-quarter dividend 12.5% to 45 cents per share.

"Our second quarter results reflect the progress we are making to consistently produce stronger financial results with net income and diluted earnings per share up from both the first quarter and a year ago," Scharf said in a press release.

"While there continue to be risks as we look forward, activity levels have remained consistent and our strong credit performance continues to point to the strength of our commercial and consumer customers' financial position."

Scharf called the lifting of the asset cap a "pivotal milestone."

"We now have the opportunity to grow in ways we could not while the asset cap was in place and are able to move forward more aggressively to serve consumers, businesses, and communities to support U.S. economic growth," he said in the release.

There's also more time to sharpen the company's strategy. "It's hard to convey the amount of time and effort the senior team has devoted to this work," Scharf said on the conference call, in reference to the bank's compliance efforts.

Saul Martinez, an analyst who covers Wells for HSBC Global Investment Research, maintained his "hold" rating on the company's shares, but indicated that the outlook is improving.

"Our Hold rating reflects optimism about the implications of positive recent regulatory developments, continued cost optimization efforts and relative capital flexibility," Martinez wrote in a research note.

Moody's Ratings Vice President Megan Fox characterized Wells' results as solid, "although performance was mixed across business lines amid various crosscurrents."

"With the asset cap now lifted, Wells Fargo can pursue growth in previously constrained areas, such as capital markets, large depositors, and lending in its growth sectors," Fox added.

Wells' total revenue topped $28.8 billion for the quarter, up about 1% from a year ago and 3% over the first-quarter total.

Net chargeoffs of $1 billion were level with the first quarter but down $300 million from a year ago. Second-quarter net chargeoffs totaled 0.44% of average loans.

Credit performance "continues to be strong," Santomassimo said on the conference call with reporters.

In May, Wells announced plans to sell its railcar leasing business for $4.4 billion, part of an effort to simplify its business model. Scharf said Tuesday that he expects the railcar sale, which is expected to close the first quarter of 2026, to be "the last [divestiture] of any size."