Wells Fargo & Co on Friday reported a bigger-than-expected 48% drop in quarterly profit as the bank set aside more funds to cover potential loan losses, while its mortgage business came under pressure from rising interest rates.
The company bolstered its loan loss reserves by setting aside $580 million in the second quarter, compared with a release of $1.26 billion a year earlier, when aggressive monetary stimulus cushioned a blow from the pandemic and supported the economy. In the last quarter, the release of the bank’s reserves helped offset a decline in its mortgage lending activity. This quarter, soaring interest rates further dampened demand for mortgages, leading to a 53% drop in home loans from a year ago.
After hiring tens of thousands of employees between 2018 and 2020 to manage rising mortgage lending and refinancing due to low interest rates, the mortgage industry is shrinking. U.S. banks, including JPMorgan Chase & Co and Wells Fargo, have begun cutting staff, with more industry layoffs expected in the coming months, analysts and economists said.
“We expect credit losses to increase from these incredibly low levels, but we have not yet seen any significant deterioration in our consumer or commercial portfolios,” Chief Executive Charlie Scharf said in a statement. . Wells Fargo shares fell nearly 3% in premarket trading.
The fourth-largest U.S. bank has been in the sanctions bench from regulators since 2016 for governance and oversight lapses related to a series of sellouts and other scandals. It remains below the Federal Reserve’s $1.95 trillion asset cap, which has reduced the loan and deposit growth Wells needs to grow interest income and cover costs.
The fourth-largest U.S. lender reported earnings of $3.1 billion, or 74 cents per share, for the quarter ended June 30, compared with $6 billion, or $1.38 per share, a year earlier. Analysts on average had expected earnings of 80 cents per share, according to Refinitiv’s IBES estimate.
Wells Fargo’s average loans rose to $926.6 billion from $854.7 billion a year earlier. Home loans saw a 53% drop in revenue compared to the previous year. Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier.
Now approaching his third year as bank boss, Scharf fought to accomplish what his two predecessors failed to do: steer the bank in the right direction after spending billions in litigation costs and of remediation. Scharf’s turnaround plan hinges on cutting $10 billion in costs a year, curtailing the lender’s huge mortgage business and growing its investment bank, which he called an opportunity to a billion dollars.
Wells Fargo’s total revenue fell to $17.03 billion from $20.3 billion a year earlier.
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