Wells Fargo & Company (WFC, Financial) reported disappointing first-quarter revenue on Thursday, in part the result of lower mortgage lending, though it topped earnings estimates after having diminished credit loss reserves.
Revenue was $17.59 billion compared to $18.06 billion in the year-ago quarter, while earnings per share were 88 cents versus $1.03, higher than estimates of 80 cents. Net income fell by 20.8% year-over-year to $3.67 billion. Management reported that home lending plummeted by 33% year-over-year on fewer mortgage originations. The latest quarter's bottom line included a benefit from a decrease of $1.1 billion, or 21 cents a share, in the allowance for credit losses.
CEO Charlie Scharf blamed the Federal Reserve for the bank's woes in a statement, saying “The Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth.” The war in Ukraine, he said, “adds additional risk to the downside.” This may seem an odd stance for a bank, until we remember that Wells Fargo has greater exposure to mortgage lending compared to many of the other major Wall Street banks.
The San Francisco, California-based bank has approximately $1.9 trillion in assets, serves one in three households and more than 10% of small businesses in the U.S.
Wells Fargo shares closed Thursday's trading at $46.35, down 4.51%, or $2.19 per share, on the lackluster earnings results.
Scharf noted in his statement, “Our results in the first quarter reflected the continued economic recovery and the progress we’ve made on our strategic priorities. We had broad-based loan growth, growing both consumer and commercial loans from the fourth quarter. Credit quality remained strong and our results included a $1.1 billion pre-tax reduction in the allowance for credit losses. We continued to return capital to our shareholders, including repurchasing $6 billion of common stock and increasing our quarterly common stock dividend to 25 cents per share.”
Wells Fargo continues to move forward with its risk and control infrastructure work and concedes that the path forward will be “uneven.” It partnered with Bilt Rewards and Mastercard (MA, Financial) to issue the first credit card that earns points on rent payments without a transaction fee. Management also began rolling out a rebuilt mobile app for customers.
First-quarter net interest income increased 5% compared to the same period in 2021, primarily due to lower mortgage-backed securities premium amortization, a decrease in long-term debt and higher loan balances, partially offset by lower interest income from loans purchased from securitization pools and Paycheck Protection Program (PPP) loans.
Noninterest income decreased 14%, driven by lower mortgage banking income primarily due to lower originations and gain on sale margins, the impact of divestitures and lower trading activity and investment banking fees.
Management also reported that mortgage originations dropped by 27% from a year ago. JPMorgan Chase & Co. (JPM, Financial) had the same problem, saying on Wednesday that its mortgage originations had dropped by 37%. “Rising rates shrink the pool of borrowers who could save on their monthly mortgage payments by refinancing,” noted the Wall Street Journal. “Higher borrowing costs can also reduce demand from potential home buyers, who already must contend with fast-rising home prices. Applications for purchase mortgages were down 6.4% for the week ended April 8, compared with the same period last year, according to the Mortgage Bankers Association.”
These decreases were partially offset by improved results in affiliated venture capital and private equity businesses, higher asset-based fees in Wealth and Investment Management on higher market valuations, and an increase in deposit-related fees.
First-quarter revenue decreased 1% compared to last year’s period. Consumer and Small Business Banking was up 11% primarily due to higher deposit balances, higher deposit-related fees primarily reflecting lower fee waivers, and an increase in debit card transaction volumes, partially offset by lower revenue from PPP loans.
