Wells Fargo shares fall as quarterly revenue misses estimates on weaker-than-expected mortgage lending

Wells Fargo on Thursday reported lower-than-expected first-quarter revenue amid a drop in mortgage lending, but beat earnings expectations as the bank decreased its credit reserves.

The company’s shares closed 4.5% lower on Thursday.

Here are the numbers:

• Earnings: 88 cents a share, vs. 80 cents estimate from Refinitiv.
• Revenue: $17.59 billion, vs. $17.8 billion estimate.

Profit dropped 20.8% from a year ago to $3.67 billion in the first quarter, Wells Fargo reported.

Slowing mortgage demand weighed on results as the Federal Reserve hikes interest rates to fight inflation and mortgage rates climb. Wells Fargo reported home lending fell 33% from the year prior.

“The Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth,” CEO Charlie Scharf said in a statement.

Wells Fargo’s first-quarter results also come as Russia’s invasion of Ukraine has injected volatility into financial markets and has raised concerns about global economic growth.

“The war in Ukraine adds additional risk to the downside,” Scharf added.

The bank’s first-quarter earnings were helped by a decrease of $1.1 billion in allowances for credit losses. The reduction added 21 cents of profit per share, Wells Fargo said.

Wells Fargo in its statement said it released the funds set aside for potential losses due to “reduced uncertainty around the economic impact of the COVID-19 pandemic on our loan portfolios, as well as a decrease in net charge-offs.”

That contrasts with moves of rivals like JPMorgan Chase, which on Wednesday said it took a $902 million charge for building reserves for anticipated credit losses.

However, Wells Fargo warned more loan losses could be on the horizon.

“While we will likely see an increase in credit losses from historical lows, we should be a net beneficiary as we will benefit from rising rates, we have a strong capital position, and our lower expense base creates greater margins from which to invest,” Scharf said.

Unlike big bank peers with its sizeable Wall Street divisions, Wells Fargo is more focused on U.S. retail and commercial banking customers. Wall Street analysts expect Wells Fargo to be among the biggest beneficiaries of rising interest rates and a rebound in loan growth, forces that should boost the interest income it collects.

Average loans totaled $898 billion, up 3% from the year prior and about 3% from the fourth quarter, Wells Fargo reported.

Wells Fargo posted net interest income of $9.2 billion, roughly in line with the StreetAccount consensus estimate and about 5% higher than the year prior. Net interest income is the revenue from the bank’s interest-bearing assets like loans and mortgages, minus what the bank pays out on deposits like savings accounts.

CFO Mike Santomassimo said the bank believes the mortgage market experienced its largest quarterly decline since 2003. Mortgage banking income totaled $693 million in the first quarter, down from $1.3 billion a year ago, Wells Fargo reported. Analysts surveyed by StreetAccount expected $880 million in mortgage banking income.

“We expect second-quarter originations and margins to remain under pressure and mortgage banking revenue to continue to decline. We started to reduce expenses in response to the decline in volume and expect expenses will continue to decline throughout the year as excess capacity is removed and aligned to lower business activity,” Santomassimo said on Wells Fargo’s earnings call.

The bank still projects overall full-year expenses to come in at $51.5 billion, but noted operating losses can be challenging to predict.

Shares of Wells Fargo are down roughly 3% this year, the best showing among the six biggest U.S. banks, most of which have posted double-digit declines. For instance, JPMorgan shares have dropped about 20% this year.

Rival banks Goldman Sachs, Citigroup and Morgan Stanley also reported quarterly results Thursday.

Led by Scharf since October 2019, Wells Fargo is still operating under a series of consent orders tied to its 2016 fake accounts scandal, including one from the Fed that caps its asset growth.

Correction: Wells Fargo decreased its allowance for credit losses by $1.1 billion. An earlier version said it had set aside more money for credit losses.