Wells Fargo (NYSE: WFC) delivered a Q3 that was broadly in line with expectations. Diluted EPS of $1.87 topped the consensus estimate by roughly a penny, while total revenue of $21.87 billion came in slightly below the $22.3 billion forecast. The headline numbers are solid enough. The quarter's real tension, however, lies in the interplay between earnings growth and capital consumption.
Net interest income rose 5% year-over-year to $12.5 billion, driven by higher loan and investment securities balances and the impact of lower interest rates on fixed-rate asset repricing. Average loans and deposits both grew 11% YoY, reflecting broad-based balance sheet expansion across all segments. Noninterest income slipped 1%, as higher investment advisory, deposit, and card fees were offset by lower trading gains and the sale of the rail car leasing business.
The expense story is worth noting. Noninterest expense declined 1% YoY to $13.74 billion, even as revenue-related compensation rose 15%. An 8% headcount reduction and lower severance costs are the primary levers. The efficiency ratio improved to 63% from 65% a year ago, but that's still above the 60% target management has discussed. The path to that target remains dependent on sustaining revenue growth while continuing to cut costs, a balancing act that gets harder as the low-hanging fruit from headcount reductions is harvested.
Wealth and Investment Management was the standout segment, with revenue up 12% YoY to $4.1 billion, driven by higher market valuations and strong net interest income growth. Commercial Banking revenue rose 6%, and Consumer Banking and Lending was up 5%. Corporate and Investment Banking revenue increased 3%, with Banking revenue up 8% on strong M&A and equity capital markets fees, partially offset by a 1% decline in Markets revenue.
This is where the quarter gets interesting: capital allocation. The bank repurchased 28.6 million shares for $2.5 billion in Q3, bringing the year-to-date total to a significant level. The CET1 ratio fell to 10.0% from 11.0% a year ago and from 10.3% in Q2. That's still above the regulatory minimum, but the trajectory is clearly downward. The buyback pace is aggressive given that the CET1 ratio is declining even as earnings grow. Management is effectively betting that the balance sheet growth and earnings momentum will be sufficient to keep capital ratios within a comfortable range. If loan growth continues at this pace, or if credit conditions deteriorate, the buffer narrows quickly.
Credit quality remains benign but is showing some early signs of normalization. Net charge-offs were $983 million, up from $942 million a year ago, driven by higher commercial real estate and commercial and industrial charge-offs. Nonaccrual loans fell to $7.06 billion from $7.64 billion in Q2, a positive sequential trend. The allowance for credit losses as a percentage of total loans declined to 1.38% from 1.52% a year ago, reflecting the improving credit mix but also leaving less room for error.
The forward read is about capital management. With the CET1 ratio at 10.0% and the buyback continuing at a $2.5 billion quarterly pace, the question is how long management can sustain this trajectory without either slowing repurchases or seeing the ratio dip below internal targets. The next quarter's loan growth and credit trends will be the key variables. If the economy holds, the strategy works. If not, the buyback will be the first lever pulled.