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Wells Fargo said Friday that second-quarter profits were down 48% from a year earlier as the bank earmarked funds for bad debt and was stung by declines in its stock holdings.
Here’s what the company reported compared to what Wall Street expected, based on a Refinitiv analyst survey:
- Earnings per share: 82 cents adjusted vs. 80 cents expected
- Revenue: $17.03 billion vs. $17.53 billion expected
Earnings of $3.12 billion, or 74 cents per share, fell sharply from $6.04 billion, or $1.38, a year earlier, the bank said in a statement. Shares of the company fell nearly 1% in premarket trading.
Without the writedown, the bank would have earned 82 cents per share in the quarter, beating analysts’ estimate of 80 cents per share polled by Refinitiv.
“While our net income declined in the second quarter, our underlying results reflected improved ability to generate earnings, lower expenses and higher interest rates resulting in strong net income growth. ‘interests,’ CEO Charlie Scharf said in the statement.
Analysts and investors have been watching bank results closely for any signs of strain in the US economy. As borrowers of all types continued to repay their loans, the possibility of an impending recession triggered by soaring interest rates and widespread declines in asset values began to show in earnings.
Wells Fargo said “market conditions” forced it to post a $576 million write-down in the second quarter on equity securities related to its venture capital business. The bank also had a provision for credit losses of $580 million in the quarter, a sharp reversal from a year earlier, when the bank benefited from the release of reserves as borrowers repaid their debts.
Scharf noted in his statement that he expected “credit losses to rise from these incredibly low levels.”
Notably, the bank’s revenue fell 16% to $17.03 billion in the quarter, about half a billion dollars below analysts’ expectations, as mortgage bank charges fell to 287. million dollars against 1.3 billion dollars a year earlier. The company also said it divested operations that brought in $589 million in the prior year period.
Higher interest rates, however, provided a tailwind during the quarter. Net interest income increased by 16% over the previous year; Scharf said the benefit of higher rates would “more than offset” additional pressure on fees from their mortgage unit and other operations.
Last month, Wells Fargo executives revealed second-quarter mortgage revenue was heading for a 50% decline from the first quarter as sharply higher interest rates reduced buying activity and of refinancing.
This is one of the impacts of the Federal Reserve’s campaign to fight inflation by raising rates by 125 basis points in the second quarter alone. Wells Fargo, which focuses on retail and commercial banking, was expected to be a big beneficiary of the rate hike.
But fears that the Fed could inadvertently tip the economy into a recession have grown this year, weighing heavily on bank stocks. Indeed, more borrowers would default on their loans, from credit cards to mortgages to commercial lines of credit, in 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 capping its asset growth. Analysts will be pleased to hear from Scharf on the progress being made in resolving these orders.
Wells Fargo shares have fallen 19% this year, roughly matching the decline of the KBW banking index.
Citigroup also announced its results on Friday; the bank beat earnings and revenue estimates on the back of rising interest rates and strong business results.
On Thursday, its biggest rival, JPMorgan Chase, released results that beat expectations by building reserves for bad debts, and Morgan Stanley disappointed with a worse-than-expected slowdown in investment banking fees.
Bank of America and Goldman Sachs are expected to release their results on Monday.
This story is developing. Please check for updates.