Wells Fargo reported second quarter earnings and sales results on Wednesday that exceeded Wall Street’s expectations as it continued to unleash funds it had allocated to hedge against widespread credit losses during the Covid-19 pandemic.
The bank’s shares rose 2% shortly after the opening bell after the earnings announcement. Second quarter versus Wall Street estimates:
- Merits: $ 1.38 earnings per share versus 97 cents per share expected according to Refinitiv, a significant reversal of the loss it suffered in the second quarter of 2020
- revenue: $ 20.27 billion versus an expected $ 17.77 billion based on Refinitiv estimates, an increase of 10% compared to the same quarter last year
Wells Fargo’s results were bolstered by a release of its $ 1.6 billion loan loss reserves as consumers outperform the bank in the face of the pandemic recession. Financial firms have started releasing these reserves as the recovery accelerated in 2021, driving profits soaring.
Wells also reported a net interest margin – a measure of how much a bank makes from the difference between its deposit and borrowing – of 2.02% for the quarter. According to FactSet, analysts expected 2.05%. The persistently low level of interest rates continued to weigh on this part of the banking business.
CEO Charlie Scharf said in a press release that demand for the bank’s credit remained somewhat subdued despite the economic recovery.
Charles Scharf, Chief Executive Officer of Wells Fargo & Co., listens during a House Financial Services Committee hearing in Washington, DC, the United States, on Tuesday, March 10, 2020.
Andrew Harrer | Bloomberg | Getty Images
“Wells Fargo has benefited from the continued economic recovery, strong markets that have contributed to profits in our related venture capital businesses, and our progress in improving efficiency, but headwinds from low interest rates and tepid credit demand have persisted,” Scharf said in the Notification of results. “Our top priority remains building an adequate risk and control infrastructure for a company of our size and complexity, and we continue to invest in additional resources and devote significant management attention to this work.”
Scharf, who took over in late 2019, is focused on improving its company’s costs and public image after a fake account scandal in 2016 sparked control of federal lawmakers and resulted in several departures from the company’s top executives.
In response, the Federal Reserve limited the bank’s asset growth and forced the bank’s new board of directors to focus on spending.
The bank posted an efficiency rate of 66% versus the FactSet estimate of 76.1%, suggesting that its operating expenses increased relative to its revenues of 80% in the June 2020 quarter.
The San Francisco-based lender’s financial update came nearly a week after CNBC reported it was closing all existing personal lines of credit and no longer offering the product in the coming weeks.
Wells Fargo’s credit lines had allowed customers to borrow $ 3,000 to $ 100,000. The bank billed the lines to consolidate higher-interest credit card debt, pay for home renovations, or avoid overdraft fees on linked checking accounts.
Wells said in a letter to clients that the move will allow him to focus on credit cards and personal loans.
Though the move upset some customers, Wells is making a comeback in 2021 amid an economic turnaround in the US, thanks to the resumption of normal business.
The improving labor market and the acceleration in capital spending thanks to the introduction of the Covid-19 vaccine have since January helped banks’ equity pull in the broader stock market.
Wells Fargo is up 43.2% this year, while rivals Bank of America and JPMorgan Chase are up 31.5% and 22.4%, respectively. The S&P 500 is up 16.3% over the same period.
Of the six largest US banks, Wells has the smallest commercial and investment banking divisions, areas that have grown in recent months thanks to a spate of IPOs and loose monetary policy.
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