Wells Fargo profit beats estimates on reserve release; revenue misses

Wells Fargo & Co (WFC.N) posted a 21% drop in first-quarter profit but beat Wall Street expectations on Thursday, as the release of funds set aside to cover potential pandemic-related loan losses cushioned a decline in mortgage lending.

The fourth-largest U.S. lender posted a $3.67 billion profit, or 88 cents per share, compared with an average analyst estimate of 80 cents per share, according to Refinitiv data. Total revenue fell 5% to $17.59 billion, compared with estimates of $17.8 billion.

Shares in the bank fell more than 3%. Analysts said that reflected investor worries that the bank’s profits were flattered by the release $1.1 billion in reserves it set aside for pandemic-related losses that did not materialize, while the bank also failed to meet expectations on reducing expenses.

“Total revenue was slightly below expectations, with mixed results,” wrote Edward Jones analyst Kyle Sanders.

Big U.S. banks are unveiling first quarter results as the Federal Reserve moves to hike interest rates to tame surging inflation and as the conflict in Ukraine is causing volatility and uncertainty in the broader global economy. That could start to dampen consumer spending and loan growth, analysts said.

So far, however, the American consumer remains healthy and is spending, and inflation is not currently a credit risk, said Wells Fargo Chief Financial Officer Mike Santomassimo.

Consumer spending has been rising for months as the United States emerges from the COVID-19 pandemic and many make up for lost time traveling, shopping and dining out. read more

“People come into this in a pretty healthy position to deal with any potential challenges,” he said on a conference call. “Inflation is definitely having an impact on people. But so far that hasn’t translated into any real stress from a credit perspective,” said Santomassimo.

Those factors, along with 3% loan growth and Fed rate hikes, led the bank to raise its guidance for full-year net interest income (NII) to around 15% from 8% last quarter. NII, a closely-watched measure of how much money banks make from lending, rose 5% during the quarter.

Wells Fargo leans heavily on revenue from its consumer and corporate banking business, as it does not have a large capital markets division compared with Citigroup and JPMorgan Chase & Co. (JPM.N).

Overall average loans grew 3%, boosted by credit card and auto lending, which rose 6% and 10% respectively. Debit card purchase volumes were up 6%, while credit card point-of-sale volumes grew 33%. Mortgage loans, however, fell 33% from a year ago on lower originations and gains from home sales.

“They had some headwinds from mortgage banking. But loan growth was broad based – in consumer and commercial – and asset quality remains pristine,” said John Mackerey, senior vice president in DBRS Morningstar’s global financial institutions group.

The bank’s non-interest expenses fell 1% on headcount cuts and real estate divestitures. While that was in line with Chief Executive Officer Charles Scharf’s plan to save about $10 billion annually over the long term, analysts were expecting more progress and noted the bank incurred charges related to remediating consumers for past sales practice misconduct.

That may have dented investors’ confidence that the bank can move beyond its scandals and be released from a Federal Reserve asset cap which restricts its loan growth, wrote Sanders.

“While today was a fresh reminder that WFC still has a lot of work to, we expected some setbacks along the way in the long-term turnaround story we see at the company,” Sanders added.

Reporting by Sohini Podder in Bengaluru and Elizabeth Dilts-Marshall in New York; Editing by Arun Koyyur, Michelle Price, Bernard Orr and Nick Zieminski.

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