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Wells Fargo profit beats as reserve release blunts hit from weak mortgage lending
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Global Banking & Finance Review®
Company
By Sohini Podder and Elizabeth Dilts Marshall
(Reuters) -Wells Fargo & Co 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.
Overall average loans grew 3% in the quarter, largely helped by credit card and auto lending. Mortgage loans, however, fell 33% from a year ago on lower originations and gains from home sales.
Big U.S. banks are unveiling results just as the Federal Reserve moves to hike interest rates to tame surging inflation, while the conflict in Ukraine is causing volatility in the markets and uncertainty in the broader economy, Chief Financial Officer Mike Santomassimo said.
Still, the American consumer is healthy, and spending and inflation has not yet emerged as a credit risk, he said.
“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.”
In fact, consumer spending has been on the rise for months, as the United States emerges from the COVID-19 pandemic and many make up for lost time traveling, shopping and dining out.
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 Goldman Sachs Group Inc and Morgan Stanley.
“For Wells, they had some headwinds from mortgage banking. But loan growth was broadbased – in consumer and commercial – and asset quality remains pristine,” said John Mackerey, senior vice president in DBRS Morningstar’s global financial institutions group.
Non-interest expenses fell 1% on lower personnel and divestitures, in line with Chief Executive Officer Charles Scharf’s plan to turn around the bank and save about $10 billion annually over the longer term.
Net interest income rose 5% during the quarter, helped by higher loan balances and a decrease in long-term debt. Overall average loans grew to $898 billion, up from $873.4 billion a year earlier.
The bank released $1.1 billion in loan loss reserves it set aside for COVID-19-related risks that did not materialize.
The fourth-largest U.S. lender posted a profit of $3.67 billion, or 88 cents per share, for the three months ended March 31, compared with $4.64 billion, or $1.02 per share, a year earlier.
Analysts on average were expecting a profit of 80 cents per share, according to Refinitiv data.
Total revenue fell 5% to $17.59 billion, compared with estimates of $17.8 billion.
Wells Fargo’s stock was down 4.2% in morning trade.
(Reporting by Sohini Podder in Bengaluru and Elizabeth Dilts-Marshall in New York; Editing by Arun Koyyur and Bernard Orr)
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