Wells Fargo reported on Friday that second-quarter profit fell 48% from a year earlier as the bank set aside funds for bad loans and was hit by a decline in its equity holdings.
Here’s what the company reported compared to what Wall Street expected, based on a survey of analysts by Refinitiv:
- Earnings per share: 82 cents adjusted vs. 80 cents expected
- Revenue: $17.03 billion vs. $17.53 billion expected
Profit 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 statement.
Excluding the impairment, the bank would have earned 82 cents per share in the quarter, beating the 80 cents per share estimate of analysts polled by Refinitiv.
The company’s shares jumped 6.6%, sharply rebounding from declines in premarket trading.
“While our net income declined in the second quarter, our core results reflect our improving earnings capacity with declining costs and rising interest rates driving strong growth in net interest income,” CEO Charlie Scharf said in the release.
Analysts and investors are closely watching bank results for signs of stress on the US economy. Although all types of borrowers continued to repay their loans, the possibility of a looming recession, driven by rising interest rates and broad declines in asset values, began to appear in the results.
Charles Scharf
Qilai Shen | Bloomberg | Getty Images
Wells Fargo said “market conditions” forced it to post a $576 million second-quarter impairment on equity securities related to its venture capital business. The bank also had a $580 million provision for loan losses in the quarter, a sharp reversal from a year earlier when the bank benefited from freeing up reserves as borrowers paid off their debts.
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, roughly half a billion dollars below analysts’ expectations, as mortgage banking fees fell to $287 million from $1.3 billion a year earlier. The company also said it sold operations that earned $589 million in the prior period.
However, higher interest rates provided a headwind during the quarter. Net interest income rose 16% from a year earlier; Scharf said the benefit of higher rates would “more than offset” further pressure on fees in their mortgage division and other operations.
Last month, Wells Fargo executives disclosed that second-quarter mortgage income was on track for a 50% decline from the first quarter as sharply higher interest rates curbed buying and refinancing activity. On Friday, the bank’s management said a further decline in mortgage income was possible in the third quarter.
This is one of the effects of the Federal Reserve’s campaign to fight inflation by raising interest rates by 125 basis points in the second quarter alone. Wells Fargo, with its focus on retail and commercial banking, was expected to be one of the big beneficiaries of the higher rates.
But concerns that the Federal Reserve will inadvertently steer the economy into recession have grown this year, weighing heavily on bank stocks. That’s because more borrowers would default on loans, from credit cards to mortgages to commercial lines of credit, during a recession.
Led by Scharf since October 2019, the bank is still operating under a series of consent orders related to its 2016 fake account scandal, including one from the Fed that limits the growth of its assets. Analysts will be happy to hear from Scharf about the progress being made to resolve these orders.
Wells Fargo shares have fallen 19% this year, roughly in line with the decline in the KBW Bank index.
Citigroup also disclosed results on Friday; the bank beat profit and revenue forecasts due to rising interest rates and strong trading results.
On Thursday, bigger rival JPMorgan Chase posted results that beat expectations as it built up bad loan provisions and Morgan Stanley disappointed with a worse-than-expected slowdown in investment banking fees.
Bank of America and Goldman Sachs are due to report results on Monday.
This story is evolving. Please check back for updates.
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