ASX bank shares have been on a tear. Over the past year, the S&P/ASX 200 Banks Index (ASX: XBK) soared 30%, surpassing the S&P/ASX 100 Index (ASX: XTO), which rose shy of 10% during the same period.
Now, all eyes are on the upcoming reporting season to take cues for the next move from here.
Meanwhile, some US banks have already started reporting earnings, starting with Wells Fargo & Co (NYSE: WFC), Citigroup Inc (NYSE: C), and JP Morgan Chase & Co (NYSE: JPM).
Of particular interest were Wells Fargo shares, which plunged nearly 6% after reporting earnings last Friday.
What caused this drop, and can we take cues from the Wells Fargo earnings for ASX bank shares?
Weaker net interest income from Wells Fargo
In the second quarter, from April to June 2024, Wells Fargo recorded US$11.92 billion in net interest income, down 9% from a year ago. Noninterest income grew 19% to US$8.77 billion, leading to a revenue growth of 1% to US$20.53 billion. Net income decreased slightly by 1% from a year ago to US$4.91 billion. Wells Fargo CEO Charlie Scharf said:
We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income.
The bank explained that the lower net interest income was due to the impact of higher interest rates on funding costs and lower deposit balances. The surge in noninterest businesses was driven by higher trading revenue in its Markets division and higher fees in investment banking and wealth management services.
Looking ahead, Wells Fargo expects FY24 net interest income to fall 8% to 9%, compared to previous guidance of 7% to 9%. The bank expects higher expenses for the full year due to higher compensation expenses and a special assessment expense. Reflecting this, the bank guided for noninterest expense of US$54 billion, compared to the previous guidance of US$52.6 billion.
Wells Fargo shares had risen 32% over the past year before Friday's 6% fall. The company's results and weaker FY24 guidance were insufficient to meet the heightened market expectations. While total revenue and profits were in line with analysts' expectations, the weaker performance in net interest income and FY24 guidance disappointed investors.
Wells Fargo's rapid contraction in net interest income might be a good indication of what to look for when ASX banks report.
How did ASX bank shares perform so far?
Like US banks, ASX bank shares rose substantially in the past year. Share price performances and FY25 price-to-earnings (P/E) ratios based on S&P Capital IQ estimates are:
- Commonwealth Bank of Australia (ASX: CBA) shares rose 30% in a year and trade at FY25 P/E of 23x
- Westpac Banking Corp (ASX: WBC) shares rose 31% in a year and trade at FY25 P/E of 15x
- National Australia Bank Ltd (ASX: NAB) shares rose 37% in a year and trade at FY25 P/E of 16x
- ANZ Group Holdings Ltd (ASX: ANZ) shares rose 21% in a year and trade at FY25 P/E of 13x
ASX banks expect to report their earnings updates in August 2024, mostly between 14 and 20 August.
