Wells Fargo profit slumps on higher loan loss reserves, mortgage weakness
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 lending business came under pressure from higher interest rates.
The fourth-largest U.S. bank reported profit of $3.1 billion, or 74 cents per share, compared with $6 billion, or $1.38 per share, a year earlier. Its total loan loss provisions were $580 million in the quarter, including a $235 million increase due to loan growth.
Under an accounting standard that took effect in 2020, banks must factor the economic outlook into loan loss reserves. Last year, the bank had released $1.6 billion from its reserves for loan losses as the economy rebounded from the pandemic.
Wells Fargo Chief Financial Officer Mike Santomassimo told reporters that retail and business customers remain strong, but the bank is prepared for a potential economic downturn.
“Things will probably get worse, but that’s already included in the overall scenario analysis and the allowance level we have for the quarter,” Santomassimo said.
Wells Fargo shares were up by around 4% in midmorning trade, compared with a 1.45% bounce in the S&P500 index (.SPX).
Big bank executives have sounded cautious so far this earnings season, with JPMorgan Chase & Co’s Chief Executive Jamie Dimon likening the macroeconomic environment to a coming “storm.”
With sky-high inflation worrying consumers, volatile markets hurting investment banking, and inverted portions of the U.S. Treasury yield curve creating challenges to income generation, American banks are facing a tough economic environment.
In line with other banks including JPMorgan, Wells reported that home lending fell this quarter, as soaring interest rates hurt demand for mortgage refinancing and originations. Revenue from home loans fell 53% from a year ago.
Wells Fargo and other mortgage lenders have cut staff in recent months as the industry downsizes after having expanded to handle a surge in demand during the pandemic.
Wells Fargo said non-interest expenses fell by 3% on lower revenue-related compensation in its home lending division.
The bank also recorded a $576 million impairment of equity securities related to investments made by the bank’s venture capital business that suffered during the market downturn in the second quarter. Executives declined to provide more details.
Wells Fargo has been in the regulators’ penalty box since 2016 for governance and oversight lapses related to a series of sales and other scandals.
It remains under the Federal Reserve’s $1.95 trillion asset cap, which has curtailed loan and deposit growth that Wells Fargo needs to boost interest income and cover costs.
LOAN DEMAND RETURNING
Apart from home lending, which Wells Fargo executives have said they plan to scale back, other consumer loans fared well.
Credit card revenue was up 7% on higher loan balances, while auto lending revenue was up 5%, and personal lending 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 16%, which David Wagner, portfolio manager at Aptus Capital Advisors, said was the “bright spot” for the quarter.
“This creates a scenario where (net interest income) could increase 20% over 2021, one of the higher growth rates in the diversified bank industry,” he added in an email.
Now approaching his third year as CEO, Wells top boss Charlie Scharf has been battling to accomplish what his two predecessors failed to do: steer the bank in the right direction after it spent billions on litigation and remediation expenses stemming from its sales scandals.
Scharf’s turnaround plan relies on cutting $10 billion in costs annually, scaling back the massive mortgage business and growing its investment bank, which he has called a $1 billion opportunity.
Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier.
Corporate and investment banking revenues were down 14% from a year ago, as the challenging macroeconomic environment and soaring volatility cut dealmaking revenues across Wall Street.
On Thursday, JPMorgan reported a 61% decline and Morgan Stanley reported a 55% decline in investment banking revenue compared with a year ago.
Wells Fargo’s total revenue fell to $17.03 billion from $20.3 billion a year earlier.