Wells Fargo Results Miss Estimates on Boost to Credit Loss Provision

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Charles W. Scharf, CEO of Wells Fargo, must steer the bank through a tricky period when profits are under pressure.


Patrick T. Fallon/AFP/Getty Images

Bank earnings season continued Friday with yet another of the major U.S. banks posting results that fell short of analysts’ expectations. This time it was

Wells Fargo
,
which posted second-quarter results that missed the mark.

Going into earnings, analyst expectations were already low. The San Francisco-based bank was expected to earn 80 cents a share on revenue of $17.5 billion. Instead,

Wells Fargo

earned 74 cents on $17 billion in revenue. In the year-ago quarter,

Wells Fargo

reported profit of $1.38 a share on $20.3 billion in revenue.

Profit in the latest second quarter totaled $3.1 billion, marking a 48% drop from the year-ago quarter.

Wells Fargo’s drop in second-quarter revenue was due in part to a slow down in mortgage banking and the divestitures from 2021. The sharp drop in profits was due to the bank boosting its provision for credit losses by $580 million in the second quarter vs. a $1.2 billion reserve release in the year ago quarter.

“While our net income declined in the second quarter, our underlying results reflected our improving earnings capacity with expenses declining and rising interest rates driving strong net interest income growth,” Charles Scarf, chief executive at Wells Fargo, said in a statement.

Banks have had to navigate a challenging second quarter. The Federal Reserve’s rapid rate-hiking plans were supposed to be a boon for lenders. Higher interest rates mean banks earn a wider spread on the interest they earn on loans and the interest they pay out in deposits. Wells Fargo, with its larger loan book, is thought to be a major beneficiary of rising rates. But when rates rise too quickly, investors worry that a recession is on the horizon, which would hurt banks due to rising defaults and lower loan demand. 

Scharf appeared appeared optimistic about the bank’s ability to navigate the challenging times. The bank saw a 16% increase in net interest income from the last year’s second quarter and net interest margin improved by 37 basis points.

“Looking ahead, our results should continue to benefit from the rising interest rate environment with growth in net interest income expected to more than offset any further near-term pressure on noninterest income. We do expect credit losses to increase from these incredibly low levels, but we have yet to see any meaningful deterioration in either our consumer or commercial portfolios,” he said.

Wall Street already got a taste of the challenges banks face when

JPMorgan Chase

(JPM) and

Morgan Stanley

(MS) posted second-quarter results that missed expectations on Thursday. Both banks suffered from capital markets activity freezing up amid recent volatility. But JPMorgan’s results were further complicated by comments chief executive Jamie Dimon made about the headwinds facing the economy including inflation, rising interest rates, and the effects of the war in Ukraine. 

Wells Fargo shares are down nearly 20% this year, matching the drop in the

SPDR S&P Bank ETF

(KBE). Investors have been hopeful that the bank is in recovery mode after years of underperformance due to its fake accounts scandal from 2016.

Wells Fargo fell 0.7% in premarket trading Friday.

Citigroup

(C) also reports results on Friday.

Bank of America

(BAC) and

Goldman Sachs

(GS) will release their second-quarter results Monday.

Write to Carleton English at carleton.english@dowjones.com