Wells Fargo profit slumps as mortgage lending business comes under pressure

Wells Fargo on Friday reported a second-quarter profit that 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 provision for soured loans was $580m in the quarter and home loans fell 53% from a year earlier.

Well Fargo's loan loss provision for the latest period included a $235m increase in the allowance for credit losses due to loan growth. Last year, the bank had released $1.26bn of reserves, helping offset a decline in its mortgage lending business.

US banks including JPMorgan and Wells Fargo have cut mortgage staff in recent months as the industry downsizes from a surge in demand during the pandemic.

Wells Fargo said it cut its non-interest expenses by 3% due to lower revenue-related compensation in its home lending division.

“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,” CEO Charlie Scharf said in a statement.

Wells Fargo shares fell nearly 3% in premarket trading.

The fourth-largest US 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.

The fourth-largest US lender reported a profit of $3.1bn , or 74c per share, for the quarter ended June 30, compared with $6bn, or $1.38 per share, a year earlier.

Home lending weakness 

Wells Fargo’s average loans rose to $926.6bn from $854.7bn a year earlier, even as the lender saw a fall in demand for mortgage refinancing and originations.

On Thursday, JPMorgan reported a 26% decline in home loan revenue from the year-ago quarter, predominantly driven by less lending.

Wells Fargo executives have said they plan to scale back the mortgage business.

Overall, non-interest expenses fell to $12.9bn from $13.3bn a year earlier.

The bank said its non-interest expenses in the consumer banking and lending unit fell 3% on “lower revenue-related compensation in home lending.”

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 $10bn in costs annually, scaling back the lender’s huge mortgage business and growing its investment bank, which he has called a $1bn opportunity.

Other consumer loans faired better at Wells Fargo. Credit card was up 7% on higher loan balances, while auto was up 5% and personal lending was up 7%, from a year earlier.

Wells Fargo’s total revenue fell to $17.03bn from $20.3bn a year earlier.

Net interest income increased 16%, the bank said.

Reuters