Wells Fargo earnings slump on rising loan loss reserves and weak mortgages

A Wells Fargo logo is seen in New York, U.S. January 10, 2017. REUTERS/Stephanie Keith

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July 15 (Reuters) – Wells Fargo & Co said on Friday its second-quarter profit nearly halved as the bank set aside more funds to cover potential loan losses, while its mortgage business came under pressure of rising interest rates.

The fourth-largest U.S. bank reported earnings of $3.1 billion, or 74 cents per share, from $6 billion, or $1.38 per share, a year earlier. Its total provisions for loan losses were $580 million in the quarter, including an increase of $235 million due to loan growth.

Under an accounting standard that came into effect in 2020, banks must factor the economic outlook into loan loss reserves. Last year, the bank released $1.6 billion from its loan loss reserves as the economy rebounded from the pandemic.

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Wells Fargo Chief Financial Officer Mike Santomassimo told reporters that consumer and business customers remain strong, but the bank is prepared for a possible economic downturn.

“Things are likely to get worse, but that is already included in the overall scenario analysis and allocation level we have for the quarter,” Santomassimo said.

Wells Fargo shares were up about 4% in mid-morning trade, against a 1.45% rebound in the S&P500 index (.SPX).

Big bank executives have appeared cautious so far this earnings season, with JPMorgan Chase & Co chief executive Jamie Dimon likening the macro environment to a “storm” to come.

With soaring inflation worrying consumers, volatile markets hurting investment banking, and inverted portions of the U.S. Treasury yield curve creating challenges for revenue generation, U.S. banks face an environment difficult economy.

Like other banks, including JPMorgan, Wells reported home lending fell this quarter as soaring interest rates hurt demand for mortgage refinancing and origination. Home loan revenue fell 53% from a year ago.

Wells Fargo and other mortgage lenders have downsized in recent months as the industry downsizes after expanding to cope with increased demand during the pandemic. Read more

Wells Fargo said non-interest expenses fell 3% due to lower revenue-related compensation in its home lending division.

The bank also recorded a $576 million write-down of equity securities related to investments made by the bank’s venture capital businesses which suffered during the market downturn in the second quarter. Leaders declined to provide further details.

Wells Fargo has been in the regulators’ sanctions bench since 2016 for governance and oversight lapses related to a series of sales and other scandals.

It remains below the Federal Reserve’s $1.95 trillion asset cap, which has dampened the growth of loans and deposits that Wells Fargo needs to grow interest income and cover costs.

LOAN APPLICATION PERFORMANCE

In addition to home loans, which Wells Fargo executives have announced plans to cut, other consumer loans have performed well.

Credit card revenue was up 7% on higher loan balances, while auto loan revenue was up 5% and personal loan revenue was up 7% from a year earlier .

Wells Fargo’s average loans rose to $926.6 billion from $854.7 billion a year earlier. Loan growth and rising interest rates helped boost net interest income by 16%, which David Wagner, portfolio manager at Aptus Capital Advisors, called a “bright spot” for the quarter.

“This creates a scenario in which (net interest income) could increase by 20% compared to 2021, one of the highest growth rates in the diversified banking sector,” he added in an e -mail.

Approaching his third year as CEO, Wells boss Charlie Scharf fought to accomplish what his two predecessors failed to do: steer the bank in the right direction after she has spent billions in litigation and remediation costs stemming from her sales scandals.

Scharf’s turnaround plan hinges on cutting costs by $10 billion a year, curtailing huge mortgage business and growing his investment bank, which he called a billion dollar opportunity of dollars.

Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier.

Corporate and investment banking revenue was down 14% from a year ago as the challenging macroeconomic environment and rising volatility reduced trading revenue on Wall Street. Read more

On Thursday, JPMorgan reported a 61% drop and Morgan Stanley reported a 55% drop in investment banking revenue from a year ago.

Wells Fargo’s total revenue fell to $17.03 billion from $20.3 billion a year earlier.

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Reporting by Noor Zainab Hussain and Niket Nishant in Bengaluru and Elizabeth Dilts Marshall in New York; Editing by Anil D’Silva, Nick Zieminski and Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

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