The lifting of the asset cap stimulates growth momentum! Wells Fargo (WFC.US) Q2 net profit surged 17%, ROTCE rose to 17.7%

The Zhitong Finance App learned that Wall Street financial giant Wells Fargo Bank (WFC.US)'s second-quarter profit exceeded Wall Street analysis's unanimous expectations, mainly due to a significant increase in wealth management and investment banking transaction fee revenue, as well as a continued steady pace of growth in net interest income. Wells Fargo said in a performance statement on Tuesday that non-interest income increased 13% to US$10.3 billion, higher than the average estimate of US$9.44 billion by Wall Street analysts. Wells Fargo said the performance data included an increase of about $728 million in net income from venture capital investments.

In terms of other core performance data, Wells Fargo's Q2 net interest income (NII) — that is, the bank's revenue after deducting relevant interest costs from interest-bearing assets — totaled around $12.3 billion, which is basically in line with analysts' expectations. Wells Fargo maintains a forecast of around $50 billion in net interest income for the full year, including around $2 billion from market operations.

“We are clearly benefiting from the broad-based strength of the US economy, but our ongoing investments and improvements in operating discipline are also driving key business indicators across all operating business sectors to show strong growth momentum.” Wells Fargo CEO Charlie Schaff said in a statement.

From regulatory shackles to capital expansion: Wells Fargo net profit surged 17%, and return on tangible common equity rose to 17.7%

In the three months ending June, Wells Fargo's net profit increased 17% year over year to US$6.4 billion, higher than Wall Street's unanimous expectations of US$2 per share, higher than Wall Street analysts' unanimous expectations of about US$1.71 per share. Revenue increased 9% to $22.6 billion.

As of press time, Wells Fargo shares were down 0.79% in pre-market trading. As of Monday, the stock had a cumulative decline of 5.9% this year, ranking second to last in the KBW Bank Index, which consists of 24 companies.

Wells Fargo was lifted last year from a long-standing regulatory penalty. Previously, the penalty limited the pace of growth in the size of its assets due to a series of scandals. The bank is currently restructuring its business structure and expanding its financing business for transactional clients to expand customer relationships that can enhance future profit growth. Wells Fargo's return on tangible common equity (ROTCE) unexpectedly rose to 17.7% in the second quarter, making it expected to meet the medium-term profit target set in October last year.

“For many years, we haven't been able to keep up with our competitors due to our inability to expand our balance sheet size. “Today, we are carefully deploying capital to support customer growth trajectories and drive company performance growth by taking on what we believe are prudent risk factors throughout the economic cycle, not just in response to the current strong economic growth environment,” Schaff said.

Wells Fargo's second-quarter investment banking fee revenue rose sharply by 35% to US$939 million. Wells Fargo ranked 6th in a list of Wall Street mergers and acquisitions compiled by Bloomberg, and also had the highest average transaction amount, highlighting its participation in some of the largest M&A deals in some of the markets this year.

Wells Fargo executives said they will continue to control costs and find ways to improve operational efficiency. Non-interest expenses for the second quarter were $13.7 billion, better than analysts' unanimous expectations. The total number of employees decreased by 7.5% compared to the same period last year to about 197,000.

Has the “compounding moment” arrived after Wells Fargo's asset cap was lifted?

Overall, Wells Fargo's latest performance report is an overall performance that is clearly strong, the profit quality is high, and significantly better than market expectations. In particular, the return on tangible common equity increased from 15.2% to 17.7%, and the efficiency ratio improved from 64% to 60%, indicating that Wells Fargo not only relies on macroeconomic success to expand revenue and profits, but is also forming positive operating leverage where revenue growth is higher than cost growth.

The net interest income that the market is most concerned about reached US$12.317 billion, up 5% year on year and 2% month on month, slightly higher than market expectations of about US$12.3 billion; average loans and average deposits increased 12% and 10% year over year, respectively, proving that after lifting the $1.95 trillion asset cap, Wells Fargo is turning the previously suppressed balance sheet expansion space into interest income. Management maintains the 2026 net interest income guideline of approximately $50 billion, which means that there is still potential for growth of about 5% for the whole year compared to about $47.7 billion in 2025. However, the net interest spread fell from 2.68% to 2.43% in the same period last year, indicating that the current increase in net interest income is mainly due to the expansion of loans, securities investment, and market business scale rather than improvements in unit asset profitability; this is not only a typical proof of growth resilience, but also a core risk that requires continuous monitoring in the future.

The non-interest business formed the second growth engine: non-interest income increased 13% year over year to US$10.305 billion, higher than market expectations of US$9.44 billion; investment banking expenses increased sharply by 35% to US$939 million, revenue from the stock business increased 64%, wealth management revenue increased 13% to US$38.92 billion, and customer assets increased 15% to more than US$2.4 trillion.

Meanwhile, Wells Fargo's credit loss reserve for the second quarter was only US$914 million, lower than the market's estimate of about US$1.19 billion; the net write-off rate fell to 0.34% from 0.44% in the same period last year, reflecting that the quality of consumer and commercial credit is still very stable. It should be noted that non-interest income includes a year-on-year increase of 728 million US dollars in net income from venture capital investments. This portion is market cyclical and cannot be fully valued based on recurring profit; however, the number of Wells Fargo employees decreased by about 7% year over year, and total expenses increased by only 2%, indicating that cost control and business expansion are still in good balance.

In other words, Wells Fargo has moved from a “story of regulatory rectification and cost reduction” to a “balance sheet expansion and capital compounding story,” which has many long-term directions; in terms of investment strategies, it is more suitable for allocating in a pullback caused by interest rates or macroeconomic concerns, rather than chasing short-term gains simply because profits surpass expectations in a single quarter. The latest results are substantially beneficial to Wells Fargo's fundamentals and medium- to long-term stock prices, and reinforce its long-term bullish trajectory, but it is not enough to prove that the stock price will rise unilaterally from now on.

After the asset cap was lifted, loan expansion, investment banking business strengthening, wealth management growth, cost discipline, and return on capital are forming a multi-engine resonance: the company bought back about $7 billion of shares in the first half of the year and plans to raise the quarterly dividend by 11% to $0.50 per share. However, whether long-term revaluation can continue depends on whether the net interest income target of 50 billion US dollars can be achieved, whether net interest spreads can stop falling, whether rapid loan growth is not at the cost of future credit losses, and whether the return on tangible common equity of around 17% can be maintained across cycles.