(Reuters) -Wells Fargo & Co reported a bigger-than-expected 48% drop in quarterly profit on Friday 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 bolstered its loan loss reserves by setting aside $580 million in the second quarter, compared with a release of $1.26 billion a year earlier, when aggressive monetary stimulus measures cushioned a blow from the pandemic and propped up the economy.
Last quarter, the bank’s reserve release helped offset a decline in its mortgage lending business. This quarter soaring interest rates further dampened demand for mortgage originations, causing home loans to fall 53% from a year ago.
After hiring tens of thousands of staff between 2018 and 2020 to handle surging mortgage originations and refinancing driven by low interest rates, the mortgage sector is downsizing.
U.S. banks including JPMorgan Chase & Co and Wells Fargo have started cutting staff, with more industry layoffs expected in coming months, said analysts and economists.
“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,” Chief Executive Officer Charlie Scharf said in a statement.
Wells Fargo shares fell nearly 3% in premarket trading.
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 needs to boost interest income and cover costs.
The fourth-largest U.S. lender 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.
Analysts on average had expected a profit of 80 cents per share, according to the IBES estimate from Refinitiv.
Wells Fargo’s average loans rose to $926.6 billion from $854.7 billion a year earlier. Home lending recorded a 53% fall in earnings from a year earlier.
Overall, non-interest expenses fell to $12.9 billion from $13.3 billion a year earlier.
Now approaching his third year as the bank’s top boss, 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 lender’s massive mortgage business and growing its investment bank, which he has called a $1 billion opportunity.
Wells Fargo’s total revenue fell to $17.03 billion from $20.3 billion a year earlier.
(Reporting by Noor Zainab Hussain and Niket Nishant in Bengaluru and Elizabeth Dilts Marshall in New York; Editing by Anil D’Silva)
