Wells Fargo profit slumps on higher loan loss reserves, mortgage weakness

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. 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.

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 company said loan loss provisions were $580 million in the quarter, including a $235 million increase in the reserves for loan losses due to loan growth. Last year, the bank had released $1.6 billion from its reserves for loan losses as the economy rebounded from the pandemic.

Under an accounting standard that took effect in January 2020, banks must factor the economic outlook into loan loss reserves. Wells Fargo Chief Financial Officer Mike Santomassimo said on a call with reporters that retail and business customers remain strong, but the bank is prepared for the possibility of an economic downturn.

"We do feel like we've got a range of scenarios we are prepared for, and that where our allowance is today is appropriate," Santomassimo said. "We think it's very much indicative of a view that things will probably get worse." Bank executives have sounded cautious so far this earnings season, with JPMorgan Chase & Co's head Jamie Dimon likening the macroeconomic environment to a coming "storm."

U.S. banks are facing a tough outlook, with sky-high inflation worrying consumers, under-pressure markets hurting investment banking and inverted portions of the U.S. Treasury yield curve creating challenges to income generation. 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.

Mortgage lenders, including Wells Fargo, have cut staff in recent months as the industry downsizes from the surge in demand it witnessed during the pandemic. 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 name the businesses. The fourth-largest U.S. bank 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. Wells reported a profit of $3.1 billion, or 74 cents per share, for the quarter ended June 30, compared with $6 billion, or $1.38 per share, a year earlier.

Wells Fargo shares were up by 1.7% in mid-morning trade. LOAN DEMAND RETURNING

Apart from home lending, which executives have said they want to scale back, other consumer loans fared better. Credit card was up 7% on higher loan balances, while auto lending was up 5% and personal lending was up 7%, from a year earlier.

Wells Fargo's average loans rose to $926.6 billion from $854.7 billion a year earlier. Now approaching his third year as chief executive officer, Wells top boss Charlie Scharf has been battling to accomplish what his two predecessors failed to do: steer the bank in the right direction after it spent billions on litigation and remediation expenses.

Scharf's turnaround plan relies on cutting $10 billion in costs annually, scaling back the massive mortgage business and growing its investment bank, which he has called a $1 billion opportunity. Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier.

Corporate and investment banking revenues were down 14% from a year ago, as the challenging macroeconomic environment and soaring volatility cut dealmaking revenues across Wall Street. On Thursday, JPMorgan reported a 61% decline and Morgan Stanley reported a 55% decline in investment banking revenue compared to a year ago.

Wells Fargo's total revenue fell to $17.03 billion from $20.3 billion a year earlier. Net interest income increased 16%, the bank said.