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

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The Wells Fargo logo will be seen in New York City, USA on January 10, 2017.Reuters / Stephanie Keith

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July 15 (Reuters)-Wells Fargo and Company closed Friday as its mortgage business was under high interest rate pressure, while banks secured more money to cover potential bad debt losses. He said profits in the second quarter were almost halved.

The fourth-largest bank in the United States reported a profit of $ 3.1 billion (74 cents per share), compared to $ 6 billion ($ 1.38 per share) in the previous year. The total allowance for doubtful accounts for the quarter was $ 580 million, including an increase of $ 235 million due to increased loans.

Accounting standards that came into force in 2020 require banks to factor their economic outlook into the allowance for doubtful accounts. Last year, as the economy recovered from the pandemic, banks released $ 1.6 billion from the allowance for doubtful accounts.

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Wells Fargo Chief Financial Officer Mike Santomasimo told reporters that retail and corporate customers remain strong, but banks are preparing for a potential recession.

“The situation will probably get worse, but it’s already included in the overall scenario analysis and quarterly tolerance levels,” Santo Masimo said.

Wells Fargo’s share price rose about 4% in the morning trading, while the S & P500 index rose 1.45%. (.SPX)..

Jamie Dimon, CEO of JPMorgan Chase and Company, likened the macroeconomic environment to the upcoming “storm,” and so far, executives at major banks have been cautiously heard.

U.S. banks have a tough economy as very high inflation plagues consumers, volatile markets hurt investment banks, and some of the U.S. Treasury yield curve has reversed, creating income-generating challenges. Facing the environment.

Like other banks, including JP Morgan, Wells reported mortgage declines this quarter as rising interest rates hurt mortgage refinancing and origination demand. Mortgage revenues were down 53% from a year ago.

Wells Fargo and other mortgage lenders have reduced staff in recent months as the industry shrank after the industry expanded to meet the surge in demand during a pandemic. read more

Wells Fargo said non-interest expenses were reduced by 3% due to lower revenue-related compensation in the mortgage sector.

Banks also recorded a $ 576 million stock impairment associated with investments in the bank’s venture capital business, which suffered during the second quarter market downturn. Executives refused to provide details.

Wells Fargo has been in the Regulatory Penalty Box since 2016 for the revocation of governance and oversight related to a series of sales and other scandals.

It remained below the Federal Reserve’s $ 1.95 trillion asset cap, curbing the growth of loans and deposits that Wells Fargo needed to increase interest income and cover costs.

Repayment of loan demand

Other consumer loans were on track, with the exception of mortgages, which Wells Fargo executives said they were planning to shrink.

Credit card revenue increased 7% due to increased loan balances, car lending revenue increased 5% and personal lending revenue increased 7% year-on-year.

Wells Fargo’s average lending increased from $ 854.7 billion in the previous year to $ 926.6 billion. Loan growth and rising interest rates helped boost net interest income by 16%. This is a “bright place” for the quarter, said David Wagner, portfolio manager at Aptus Capital Advisors.

“This creates a scenario where (net interest income) could increase by 20% compared to 2021, which is one of the highest growth rates in the diversified banking industry,” he said. I added it by email.

Wells’ top boss, Charlie Schaff, is in his third year as CEO and has fought to achieve the failure of his two predecessors. Guide banks in the right direction after spending billions of dollars on litigation and repair costs resulting from sales scandals.

Scharf’s turnaround plan relies on reducing annual costs by $ 10 billion, shrinking large mortgage businesses and growing investment banks. This is what he calls a billion dollar opportunity.

Overall, non-interest expenses decreased from $ 13.3 billion in the previous year to $ 12.9 billion.

Corporate and investment banking revenues were down 14% from a year ago, as trading revenues across Wall Street declined due to the harsh macroeconomic environment and soaring volatility. read more

On Thursday, JP Morgan reported a 61% decline, and Morgan Stanley reported a 55% decline in investment banking earnings compared to a year ago.

Wells Fargo’s total revenue decreased from $ 20.3 billion in the previous year to $ 17.03 billion.

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Reported by Noor Zainab Hussein and Niket Nishant of Bangalore and Elizabeth Diltz Marshall of New York. Edited by Anil D’Silva, Nick Zieminski and Jonathan Oatis

Our criteria: Thomson Reuters trusts the principles.

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