12 Sep

Weak Real Estate Lending Is Hurting Wells Fargo’s Credit Growth

WRITTEN BY Andrew Brunton FEATURED IN Company News, Insights, & Analysis

Declining lending

Corporate lending and structured debt growth have fallen in recent quarters due to the Federal Reserve’s hawkish monetary policies and lower tax, weakening US banks’ credit growth. Wells Fargo & Company (WFC), which is already struggling with compliance- and fraud-related issues, has seen stable to negative credit growth.

The company’s total loanbook, including retail and commercial loans, came in at $944 billion in the second quarter, which was lower than its levels of $957 billion in the second quarter of 2017 and $947 billion in the first quarter of 2018. On the contrary, major banking peers (XLF) Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C) managed growth of 2%–7% in the second quarter.

Weak Real Estate Lending Is Hurting Wells Fargo’s Credit Growth

Weakening retail lending

In recent quarters, real estate lending has weakened due to increasing interest rates and demand not picking up significantly since the 2007 financial crisis. Consumer loans have fallen steeply in recent quarters due to higher interest rates, which have made automobile, junior lien mortgage portfolio, revolving credit, and installment loans costlier.

In the second quarter, Wells Fargo’s commercial loanbook fell marginally YoY (year-over-year) by $291 million to $503 billion. The YoY fall was mainly due to softness in real estate lending, which was partially offset by industrial and manufacturing lending growth.

In recent quarters, the company’s retail lending has weakened more quickly than its commercial lending due to rising interest rates. Wells Fargo could target international retail lending across trading, wealth, and core banking products. Expanding credit will remain key to the bank’s performance, as non-interest income drivers have been subdued amid weaker broader market return expectations.

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