Register now for FREE unlimited access to Reuters.com
July 15 (Reuters) – Wells Fargo & Co said on Friday its second-quarter profit nearly halved as the bank set aside more funds to cover potential loan losses, while its mortgage lending business came under pressure from higher interest rates.
The fourth-largest U.S. bank reported profit of $3.1 billion, or 74 cents per share, compared with $6 billion, or $1.38 per share, a year earlier. Its total loan loss provisions were $580 million in the quarter, including a $235 million increase due to loan growth.
Under an accounting standard that took effect in 2020, banks must factor the economic outlook into loan loss reserves. Last year, the bank had released $1.6 billion from its reserves for loan losses as the economy rebounded from the pandemic.
Wells Fargo Chief Financial Officer Mike Santomassimo told reporters that retail and business customers remain strong, but the bank is prepared for a potential economic downturn.
“Things will probably get worse, but that’s already included in the overall scenario analysis and the allowance level we have for the quarter,” Santomassimo said.
Wells Fargo shares were up by around 4% in midmorning trade, compared with a 1.45% bounce in the S&P500 index (.SPX).
Big bank executives have sounded cautious so far this earnings season, with JPMorgan Chase & Co’s Chief Executive Jamie Dimon likening the macroeconomic environment to a coming “storm.”
With sky-high inflation worrying consumers, volatile markets hurting investment banking, and inverted portions of the U.S. Treasury yield curve creating challenges to income generation, American banks are facing a tough economic environment.
In line with other banks including JPMorgan, Wells reported that home lending fell this quarter, as soaring interest rates hurt demand for mortgage refinancing and originations. Revenue from home loans fell 53% from a year ago.
Wells Fargo and other mortgage lenders have cut staff in recent months as the industry downsizes after having expanded to handle a surge in demand during the pandemic. read more
Wells Fargo said non-interest expenses fell by 3% on lower revenue-related compensation in its home lending division.
The bank also recorded a $576 million impairment of equity securities related to investments made by the bank’s venture capital business that suffered during the market downturn in the second quarter. Executives declined to provide more details.
Wells Fargo has been in the regulators’ penalty box since 2016 for governance and oversight lapses related to a series of sales and other scandals.
It remains under the Federal Reserve’s $1.95 trillion asset cap, which has curtailed loan and deposit growth that Wells Fargo needs to boost interest income and cover costs.
Apart from home lending, which Wells Fargo…