Wells Fargo announced on Friday that its second-quarter profit fell 48% from the same period last year due to the bank setting aside money for poor loans and being hurt by decreases in its stock holdings.
According to a Refinitiv survey of analysts, the following discrepancy exists between what the firm reported and what Wall Street was anticipating:
- Earnings per share: adjusted 82 cents against 80 cents anticipated
- $17.03 billion in revenue as opposed to the expected $17.53 billion
Profit of $3.12 billion, or 74 cents per share, decreased significantly from $6.04 billion, or $1.38, a year earlier, according to a statement from the bank.
Without the impairment, the bank would have earned 82 cents per share in the quarter, above the analysts’ consensus estimate of 80 cents per share from Refinitiv.
After falling in premarket trade, the company’s shares spiked by 6.6 percent.
CEO Charlie Scharf stated in the press release that “despite a fall in net income in the second quarter, our underlying performance demonstrated our growing earning capability with expenses declining and rising interest rates supporting solid net interest income growth.”
Analysts and investors have been attentively examining bank statistics for any indications that the U.S. economy is under duress. All borrowers have kept up with their loan payments, but signs of a potential recession caused by rising interest rates and widespread asset value decreases are starting to show up in the data.
In the second quarter, Wells Fargo declared impairment of $576 million on equity securities related to its venture capital business due to “market conditions.” The bank also made a $580 million credit loss provision during the quarter, which is a dramatic contrast to a year earlier, when the bank profited from the release of reserves as borrowers paid off their obligations.
In his remark, Scharf anticipated that “credit losses will climb from current extraordinarily low levels.”
Notably, fees from mortgage banking plunged to $287 million from $1.3 billion a year earlier, causing the bank’s income to drop 16 percent to $17.03 billion in the quarter, about half a billion dollars below analysts’ expectations. Additionally, the business disclosed that it had sold off businesses that had generated $589 million in revenue the previous year.
Nevertheless, the quarter did benefit from higher interest rates. Since last year, net interest revenue has increased by 16 percent. According to Scharf, the gain from higher rates will “more than balance” any future impact on fees in their mortgage section and other operations.
Wells Fargo officials said last month that the second quarter’s mortgage revenue was projected to fall by 50% from the first quarter due to dramatically higher interest rates on buy and refinancing activity. On Friday, the bank’s management indicated that a pothere was potential additional fall in mortgage revenue during the third quarter.
It is a result of the Federal Reserve boosting interest rates by 125 basis points in just the second quarter as part of its campaign to combat inflation. With its emphasis on retail and business banking, Wells Fargo was widely anticipated to benefit significantly from higher rates.
However, worries that the Fed would unintentionally push the economy into a recession have intensified this year, which has significantly impacted bank stock prices. That’s because more borrowers would default on loans in a downturn, including credit cards, mortgages, and business lines of credit.
Since October 2019, Scharf has served as the bank’s CEO. The bank continues to operate under several consent orders related to its 2016 false accounts scandal, including one from the Fed that limits its asset growth. Analysts are eager to learn from Scharf about any developments towards resolving those directives.
This year, Wells Fargo’s stock price has fallen 19 percent, substantially in line with the loss of the KBW Bank Index.
On Friday, Citigroup also released its earnings, and thanks to higher interest rates and successful trading, the bank beat sales and profit forecasts.
On Thursday, bigger rival JPMorgan Chase reported earnings that fell short of forecasts as it increased reserves for problematic loans. At the same time, Morgan Stanley let investors down with a slower-than-anticipated decline in investment banking fees.
Monday is when Bank of America and Goldman Sachs are expected to release their earnings.