Wells Fargo signage on May 5, 2021 in New York City.
Bill Tompkins | Michael Ochs Archive | Getty Images
Wells Fargo on Thursday reported lower-than-expected first-quarter earnings amid a slowdown in mortgage lending, but beat earnings expectations as the bank reduced its loan reserves.
Shares fell more than 3% in premarket trading.
Here are the numbers:
- merits: 88 cents per share, higher than Refinitiv’s estimate of 80 cents per share.
- revenue: $17.59 billion versus an estimate of $17.8 billion.
Wells Fargo reported that home loans are down 33% year over year as mortgage rates have risen and dampened demand. The Federal Reserve is raising interest rates to fight inflation.
“Our internal indicators continue to point to the strength of our customers’ financial positions, but the Federal Reserve has made it clear that it will take the necessary action to bring down inflation, and this will certainly reduce economic growth,” said CEO Charlie Scharf in a statement.
Mortgage lender revenue totaled $693 million in the first quarter, Wells Fargo reported. Analysts polled by Street Account expected $880 million in mortgage lender revenue.
Wells Fargo’s first-quarter results also come as Russia’s invasion of Ukraine has brought volatility to financial markets and raised concerns about global economic growth.
“Moreover, the war in Ukraine further increases the downside risk,” added Scharf.
Unlike big bank peers with their sizable Wall Street divisions, Wells Fargo focuses more on US retail and commercial banking customers. Wall Street analysts expect Wells Fargo to be among the biggest beneficiaries of rising interest rates and a rebound in credit growth, forces that should boost interest income.
Wells Fargo reported net interest income of $9.2 billion, which is roughly in line with the StreetAccount consensus estimate and about 5% higher year-over-year. Net interest income is the income from the bank’s interest-bearing assets, such as loans and mortgages, less the bank’s payments on deposits, such as savings accounts.
The bank’s first-quarter results were supported by a $1.1 billion decrease in loan loss allowances in the first quarter. Wells Fargo cited “reduced uncertainty about the economic impact of the COVID-19 pandemic on our loan portfolios and a decrease in net charge-offs,” according to the press release.
That contrasts with the movements of competitors like JPMorgan Chase. JPMorgan on Wednesday said it charged a $902 million fee for creating reserves for expected credit losses.
However, Wells Fargo warned that more loan losses could be on the horizon.
“While we are likely to see loan losses rise from historical lows, we should be a net beneficiary as we stand to benefit from rising interest rates, we have a strong capital position and our lower cost base creates larger margins for investments,” Scharf said.
Wells Fargo shares are up about 1% this year, the best return among the top six U.S. banks, most of which have posted double-digit declines. For example, shares of JPMorgan are down more than 19% this year.
Wells Fargo has been run by Scharf since October 2019 and is still operating under a number of consent orders related to its 2016 fake account scandal, including one from the Fed limiting asset growth. Analysts are keen to hear from Scharf on progress in filling these orders.
Rival banks Goldman Sachs, Citigroup and Morgan Stanley also released quarterly results on Thursday.
(Correction: An earlier version of the story incorrectly stated that the bank had accrued more money for loan losses in the first quarter. The bank reduced its loan loss allowance by $1.1 billion in the quarter.)
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