Wells Fargo Profit Declines On Higher Loan Loss Reserves

On Friday, Wells Fargo & Co disclosed that its profit for the second quarter of the year nearly halved, as it set aside more funds for covering potential losses in loans. Meanwhile, the hike in the interest rates put pressure on the bank’s mortgage lending business.

Profit falls

The profit of the fourth largest bank in the United States for the second quarter was about $3.1 billion, which makes it 74 cents a share. A year earlier, the same figure had stood at $6 billion, or $1.38 a share. The quarter also saw its loan provisions come to $580 million, which included an increase of $253 million because of loan growth.

In 2020, a new accounting standard was implemented under which banks are required to incorporate the economic outlook when calculating loan loss reserves. As the economy was recovering from the pandemic last year, a total of $1.6 billion had been released by the banks for its loan loss reserves.

Mike Santomassimo, the Chief Financial Officer of Wells Fargo, stated that even though business and retail customers had remained strong, the financial institution was bracing for an economic downturn. He said that they expected things to get worse and it had been incorporated in the allowance level and scenario analysis for the quarter.

Share impact

In mid-morning trading, the shares of Wells Fargo had gained by 4%, as opposed to a bounce of 1.45% that was recorded in the S&P 500 index. The earnings season has seen executives of big banks take a cautious approach so far. Jamie Dimon, the CEO of JPMorgan Chase & Co referred to the macroeconomic environment as a ‘storm’.

Investment banking is taking a hit due to volatile markets, while consumers are worried due to rising inflation. Income generation is also becoming a challenge because of inverted US Treasury yield curves. All of this has created a tough environment for American banks.

Mortgage refinancing

As in the case with other banking institutions like JPMorgan, home lending also declined for Wells Fargo in the second quarter because demand for mortgage refinancing took a hit due to an increase in interest rates. There was a 53% drop in revenue from home loans, as compared to a year earlier.

In recent months, there have also been workforce layoffs by mortgage lenders, including Wells Fargo. This is because the industry is downsizing after it had been expanded to cope up with a demand surge during the pandemic.

There was also a 3% decline in the non-interest expenses of Wells Fargo because its home lending division saw its revenue-related compensation fall. Equity securities also saw an impairment of $576 million because of the investments that the venture capital arm of the bank had made. These suffered because of the downturn in the market in the second quarter.

Wells Fargo has also been dealing with a number of scandals and problems in several sales that have put it in the penalty box of regulators since 2016.