Wells Fargo Profit Falls as Energy Loans Sour, Costs Climb

  • Second-quarter net income declined 2.8% to $5.6 billion
  • Expenses rose 3.2 percent on higher compensation, benefits

The Numbers Don’t Lie: Wells Fargo Earnings

Wells Fargo & Co., the world’s most valuable bank, said second-quarter profit fell 2.8 percent as more energy loans soured, expenses rose and revenue from mortgage lending declined.

Net income slid to $5.6 billion, or $1.01 a share, from $5.72 billion, or $1.03, a year earlier, the San Francisco-based company said Friday in a statement. That matched the average estimate of 30 analysts surveyed by Bloomberg. Mortgage banking revenue declined 17 percent from a year earlier to $1.41 billion, falling short of the $1.8 billion estimates of Oppenheimer & Co.’s Chris Kotowski and Jefferies Group’s Ken Usdin.

“Revenue growth has not been strong enough to offset growth in rising credit costs,” said Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis. “Because of that, Wells Fargo, which historically has been a very consistent earnings-per-share grower, has seen earnings per share contract.” 

Wells Fargo shares dropped 2 percent to $47.96 at 9:43 a.m. in New York, the worst performance in the 24-company KBW Bank Index. The stock has fallen 12 percent this year.

The lender, led by Chief Executive Officer John Stumpf, has been dealing with worsening energy loans for the last few quarters while also battling to eke out returns as persistently low interest rates have squeezed margins. Net interest margin, the difference between what a bank pays for deposits and earns on loans, decreased 4 basis points in the quarter to 2.86 percent, falling short of some analysts’ estimates. The measure, known as NIM, has declined the past four quarters.

“It was the energy portfolio which surprised to the downside,” Chris Wheeler, an analyst at Atlantic Equities LLP wrote in a note to clients. “The oil and gas portfolio remains under significant pressure.”

Provisions for credit losses more than tripled to $1.07 billion from a year earlier, tied largely to the bank’s oil and gas portfolio, while net write-offs rose about 42 percent to $924 million, Wells Fargo said. Net interest income, including the loan-loss provision, declined 2.8 percent to $10.7 billion from a year earlier.

Revenue Climbs

Total revenue rose 4 percent to $22.2 billion, in line with analysts’ estimates, while expenses climbed 3.2 percent to $12.9 billion on higher employee compensation and benefits. Total loans climbed 7.7 percent to $957.2 billion, while fees collected from cards rose 7.2 percent to $997 million.

Profit from wholesale banking fell 5.4 percent to $2.07 billion from a year earlier, while community bank earnings declined 1.2 percent to $3.18 billion, according to the statement. Wealth-management net income slid less than 1 percent to $584 million.

Return on equity, a measure of profitability, fell about one percentage point to 11.7 percent from a year earlier.

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