With business at its Des Moines-based home-lending unit plummeting, earnings at Wells Fargo & Co. almost halved in the last quarter.
The banking giant reported on Friday net income of $3.12 billion for the April, May and June period. That’s less than the $6.04 billion Wells Fargo earned in the same period last year.
A decline in customers taking out mortgages was the biggest driver of the change, as the San Francisco-based bank posted $972 million in revenue in the quarter, down 53 percent from $2.07 billion in the same period in 2021.
Mortgage lending has fallen sharply across the industry this year as the Federal Reserve’s Open Market Committee has raised interest rates to slow the pace of inflation. The 9.1% increase in inflation in June was the largest since the early 1980s.
From January to March, Wells Fargo reported a 33% year-over-year decline in home loan revenue. The decline in the segment particularly affected the company’s employees in central Iowa. Since April, the company has laid off about 200 workers from the home loan unit, the metro’s largest private employer.
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Chief Financial Officer Mike Santomassimo told analysts on a call Friday that the mortgage business will likely continue to struggle through the end of the year.
“The mortgage market is expected to remain challenging in the near term and we may see a further decline in mortgage banking revenue in the third quarter,” he said. “We are making adjustments to reduce costs in response to lower volume generation and expect these adjustments to continue over the next several quarters.”
The Mortgage Bankers Association predicts that mortgage lending will remain well below 2021 levels for the next few years. After recording about $3.99 billion in revenue last year, the association forecasts industry-wide revenue of $2.41 billion this year, a 40 percent decline.
Although investors expected a decline for Wells Fargo, Friday’s report was worse than Wall Street had expected. Wells Fargo reported $17.08 billion in total revenue, about $450 million short of analysts’ consensus estimate, according to FactSet.
The company’s financial report was downgraded in part due to an accounting maneuver, as Wells Fargo set aside about $580 million in projected loan losses, anticipating that customers would be unable to repay some loans due to a future downturn in the economy. The company made a similar adjustment in 2020, although the recession caused by the pandemic shutdown that year proved short-lived. Wells Fargo later released those funds from reserves.
Despite the bad news, the market reacted positively to Friday’s report, with the company’s share price up about 6% by afternoon. Shares of Wells Fargo are down 19% year-to-date, roughly in line with the KBW Bank index.
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In a statement Friday, CEO Charlie Scharf struck an upbeat tone, pointing out that Wells Fargo should be making more money as interest rates continue to rise — even if fewer people take out mortgages.
“Our results should continue to benefit from the rising interest rate environment with growth in net interest income expected to more than offset any further near-term pressure on non-interest income,” Scharf said.
As of Thursday, the average 30-year fixed-rate mortgage in the United States was paying 5.5 percent, up from 3.1 percent at the start of the year. That’s still a historically low rate, but it means homebuyers’ purchasing power has been squeezed at a time when home prices — like the $283,500 median reported by the Des Moines Metro Area Association of Realtors in June – continue to set records.
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With costs for everything from cars to food to fuel rising rapidly, the Federal Reserve has tried to slow the economy by raising interest rates this year. The Open Market Committee raised its key interest rate by 0.75 percentage points in June, the largest increase since 1994.
After the U.S. Bureau of Labor Statistics released its latest inflation report on Wednesday showing that spending continued to rise in June, many investors believe the Federal Reserve will raise the benchmark interest rate by a full percentage point at its next meeting on July 26. That would mark the biggest single-match increase since 1980.
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Despite the big decline in home lending, Wells Fargo reported gains in some other segments. The company’s earnings in middle market banking increased by $308 million. Credit card lending earnings increased $86 million.
In a preview of Wells Fargo’s June 30 earnings, Piper Sandler analyst Scott Seifer wrote that modeling the company’s performance is difficult because of how quickly markets change. He said the company would make more money on each loan but see fewer customers.
“It seems clear to us that this is going to be a really solid quarter (net interest income) for (Wells Fargo), but fees should be a real pressure point,” he wrote.
Tyler Jett covers jobs and the economy for the Des Moines Register. Contact him at [email protected], 515-284-8215 or on Twitter at @LetsJett.