Wells Fargo profit drops as loan provisions rise

Bank teller Tyler Wong talks to a customer at the Wells Fargo bank in Denver, Colorado. (Reuters)

NEW YORK: Wells Fargo & Co. reported a 3.5 percent fall in quarterly profit on Friday as it set aside more money to cover potential losses on new loans it made.
The bank, the biggest US mortgage lender, said its net income applicable to common shareholders fell to $5.2 billion in the second quarter, from $5.4 billion a year earlier.
Earnings per share slipped to $1.01 from $1.03, matching the average analyst forecast, according to Thomson Reuters I/B/E/S. Revenue rose 4 percent to $22.2 billion.
Although Wells' results were generally in line with expectations, Oppenheimer analyst Chris Kotowski said they were "an indication of how difficult revenue growth is to come by."
Wells Fargo shares slipped 0.9 percent to $48.52 in premarket trading. Up to Thursday's close, its stock had dropped about 10 percent since the start of the year, but Wells remained the most highly valued US bank.
Like JPMorgan Chase & Co. on Thursday, Wells said it grew its loan book significantly during the second quarter, especially in commercial loans, auto loans and credit cards. Residential mortgage loans also grew, but revenue from that business fell.
Wells Fargo's $950.8 billion worth of average loans during the quarter was 9-percent above the year-ago and 3 percent higher than the prior period. It was the 16th consecutive quarter of loan growth for the San Francisco-based bank.
But with that growth comes the need to boost reserves against loan losses that are possible in the future. The banking industry had been reducing reserves for years as credit conditions improved following the 2007-2009 crisis, but lenders are now building them again.
Wells' provisions for loan losses of $1.1 billion more than tripled from the year-ago quarter, and were 49-percent higher than the first quarter. The bank said its overall credit quality was "solid," with the exception of its oil and gas portfolio, which has come under pressure due to the decline in energy prices.
A sharp drop in interest rates during the second quarter made it difficult for Wells to grow revenue enough to make up for the cost of reserve building.
When rates get too low, the gap between what it costs banks to obtain funding and what they can earn from investing or lending tends to narrow. Wells' net interest margin — which measures interest income as a portion of assets — declined on both an annual and quarterly basis.
Wells Fargo's mortgage banking revenue fell 17 percent even amid a wave of new business. The decline came from its mortgage-servicing portfolio, where hedges on the direction of interest rates were less effective, and where the bank faced higher costs.
Unlike some other big banks, Wells Fargo may not see some of the benefit from second-quarter low interest rates in its mortgage operations until the third quarter, because of differences in accounting, KBW analyst Brian Kleinhanzl told reporters ahead of Friday's earnings.