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Wells Fargo said Friday that second-quarter profit fell 48% year-on-year as the bank reserved funds for bad loans and suffered from declines in its equity holdings.
Here’s what the company reported, compared to Wall Street expectations, based on a poll of analysts by Refinitiv:
- Earnings per share: 82 cents adjusted vs. 80 cents expected
- Revenue: $17.03 billion versus $17.53 billion expected
Earnings of $3.12 billion, or 74 cents a share, fell sharply from $6.04 billion, or $1.38 a year earlier, the bank said in a expression. Shares of the company fell nearly 1% in premarket trading.
Excluding the impairment, the bank would have made 82 cents a share in the quarter, beating the estimate of 80 cents a share by analysts polled by Refinitiv.
“While our second quarter net income declined, our underlying results reflected our improving profitability with declining expenses and rising interest rates driving strong net interest income growth,” CEO Charlie Scharf said in the press release.
Analysts and investors have been scouring banks’ results for signs of stress in the US economy. As borrowers of all types continue to repay their loans, the results are beginning to raise the possibility of a looming recession fueled by rising interest rates and broad asset declines.
Wells Fargo said that “market conditions” forced it to take a $576 million impairment on stocks related to its venture capital business in the second quarter. The bank also had a provision for loan losses of $580 million during the quarter, a significant reversal from a year earlier, when the bank benefited from the release of reserves as borrowers repaid their debt.
Scharf noted in his statement that he expects “credit losses to increase from these incredibly low levels.”
Notably, the bank’s revenue fell 16% to $17.03 billion in the quarter, about a half billion short of analysts’ expectations, given the $1.3 billion in mortgage banking fees collapsed to $287 million last year. The company also said it divested businesses that brought in $589 million in the prior-year period.
However, higher interest rates provided a tailwind during the quarter. Net interest income increased 16% year-on-year; Scharf said the benefit from higher interest rates would “more than offset” the continued pressure on fees at her mortgage department and other businesses.
Last month, Wells Fargo executives announced that second-quarter mortgage income was headed for a 50% drop from the first quarter, as sharply increased interest rates restricted purchasing and refinancing activities.
This is one of the effects of the Federal Reserve’s campaign to fight inflation, raising interest rates by 125 basis points in the second quarter alone. It was widely expected that Wells Fargo, with its retail and commercial banking focus, would be one of the big beneficiaries of higher interest rates.
But fears that the Fed could inadvertently plunge the economy into recession have grown this year, weighing heavily on bank stocks. That’s because in a recession, more borrowers would default on loans, from credit cards to mortgages to commercial lines of credit.
The bank, which has been run by Scharf since October 2019, is still operating with a number of consent orders related to its 2016 fake account scandal, including one from the Fed limiting its wealth growth. Analysts will be eager to hear from Scharf on progress in filling those orders.
Wells Fargo’s stock is down 19% this year, roughly in line with the US dollar’s decline KBW banking index.
A bigger rival on Thursday JPMorgan Chase posted results that missed expectations as it built up reserves for bad loans, and MorganStanley disappointed with a worse than expected slower in investment banking fees.
This story evolves. Please check back for updates.