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Wells Fargo second-quarter profit fell 48% from a year earlier as the bank charged for bad loans and was hit by declines in its stock, it said on Friday.
Here’s what the company reported compared to Wall Street expectations, based on a survey of analysts by Refinitiv:
- Earnings per share: 82 cents adjusted. Expected 80 cents
- Revenue: $17.03 billion, $17.53 billion expected
Profit of $3.12 billion, or 74 cents per share, was down sharply from $6.04 billion, or $1.38 a share, a year earlier, the bank said in a report. statement. The company’s shares were down about 1% in premarket trading.
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.
“While our net income declined in the second quarter, our bottom line results reflected increased net interest income, lower costs, and improved earnings opportunities with rising interest rates,” CEO Charlie Scharf said in the release.
Analysts and investors closely scrutinized bank results for any sign of stress in the US economy. While borrowers of all types continued to repay their loans, the prospect of a looming recession fueled by rising interest rates and broad declines in asset values began to show in the results.
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 made a $580 million provision for loan losses in the quarter, a sharp decline from a year ago, when the bank benefited from freeing up provisions as borrowers paid down their debts.
Scharf said in a 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, nearly half a billion dollars below analysts’ expectations, as commissions from mortgage banking fell to $287 million from $1.3 billion a year ago. The company also said it was divesting $589 million in revenue earlier in the year.
However, higher interest rates provided a tailwind in the quarter. Net interest income increased by 16% compared to the previous year; Scharf said the benefit from higher rates would “more than offset” the additional pressure on payments on their mortgage units and other transactions.
Last month, Wells Fargo executives announced that second-quarter mortgage revenue rose through 2018. 50% reduction since the first quarter, sharply higher interest rates have limited purchasing and refinancing activity.
This is one of the effects of the Federal Reserve’s anti-inflation campaign, raising 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 higher rates.
But concerns that the Fed will inadvertently drag the economy into recession have grown, weighing heavily on bank stocks this year. That’s because more borrowers defaulted on loans during the recession, from credit cards to mortgages and commercial lines of credit.
As of October 2019, the bank headed by Scharf still operates under a number of consent orders related to the 2016 fake accounts scandal, including one from the Fed that limits asset growth. Analysts will want to hear from Scharf on any progress made to resolve those orders.
Shares of Wells Fargo are down about 19% this year. KBW Bank Index.
Thursday, an even bigger opponent JPMorgan Chase published the results missed expectations as it builds provisions for bad loans and Morgan Stanley disappointed worse than expected don’t slow down in investment banking fees.
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