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Margaret Moran
Margaret Moran
Articles (253) 

Wells Fargo Earnings Plummet on High Pandemic Reserves

The out-of-favor bank sets out bleak guidance

July 14, 2020 | About:

Before the market opened on July 14, Wells Fargo & Co. (NYSE:WFC) reported its earnings results for the second quarter of 2020.

Not only did the major U.S. bank post a quarterly loss, it also missed analysts’ predictions, causing the share price to drop approximately 4% for the day.

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Revenue came in at $17.8 billion, while the net loss was $2.4 billion, or 66 cents per share. Analysts had called for revenue of $18.4 billion and a loss per share of 20 cents.

Overview of the quarter

The bank’s first quarterly loss since the Great Recession in 2008 was largely due to the $8.4 billion in loan loss reserves that the company set aside for expected loan defaults as well as forgiveness on loans from government assistance programs such as the Paycheck Protection Plan.

When compared to assets under management, Wells Fargo is putting aside a higher percentage of funds for loan losses when compared to competitors such as JPMorgan Chase & Co. (NYSE:JPM). Wells Fargo had $1.8 trillion in client assets at the quarter’s end, down 4% from a year ago, which means its loan loss provisions represent 0.46% of client assets and 0.90% of loans, while JPMorgan’s assets under management increased 15% to $2.5 trillion as of the quarter’s end, meaning its loan loss provisions represent 0.35% of client assets and 0.89% of loans.

While this could indicate that Wells Fargo is simply being more cautious than other U.S. bank majors, it seems equally likely (if not more likely) that it could be due to Wells Fargo taking on more loans and more high-risk loans.

“Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter,” CEO Charlie Scharf said.

Further exacerbating the bank’s difficult situation are the regulations imposed on the bank due to its fake accounts scandal in 2016. Though Wells Fargo was granted a temporary exception to its asset cap in order to allow it to participate in Covid-19 loan programs, it was forbidden from reaping any potential profits from these endeavors, effectively giving its pandemic-related loans zero upside and unlimited downside. The liquidity coverage ratio of 129% continues to exceed the federally required minimum of 100%, indicating some room for loss (though this is just an estimate).

Wells Fargo saw declines in revenue in most segments, with traditional banking service charges down 22%, trust and investment fees down 5%, mortgage banking income down 16% and net interest income down 14% compared to the prior-year quarter.

Loan balances at the end of the period were $935.2 billion, down by $74.7 billion compared to a year ago as new loans and drawing on existing lines of credit was outweighed by paydowns, a decrease in credit card activity and a reclassification of $10.4 billion held for sale.

The board of directors announced its intention to cut the dividend to 10 cents for the third-quarter 2020 payment.

Guidance

Wells Fargo did not provide concrete guidance for the third quarter or full year, though it does expect the pandemic and the economic recession to continue putting pressure on its margins, with high loan losses expected as well. Compared to other top U.S. bank majors, Wells Fargo also has a much smaller footprint on Wall Street, meaning it is more impacted by low interest rates and other warning signs for traditional banking income.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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