Wells Fargo profits fall as higher rates hinder home buyers

Wells Fargo, the nation’s largest mortgage lender, saw revenue and profit decline in the second quarter as rising interest rates drove people out of the housing market.

The San Francisco bank earned $3.1 billion in the period, or 74 cents a share, below the 80 cents a share forecast by analysts surveyed by data provider FactSet. Revenue was $17 billion, down 16% from last year and below the $17.5 billion projected by Wall Street. The bank had revenue of $20.3 billion and earnings per share of $1.38 in the same period a year ago.

Wells’ revenue from its home lending division fell 53% in the period as the real estate market cooled on rapidly rising interest rates. Mortgage loan originations, including refinancing, fell sharply in the quarter.

The Mortgage Bankers Association reported Wednesday that mortgage applications are down 14% from last year and refinances are down 80%. Existing home sales have fallen for four straight months, during what is typically the busiest time of year for real estate.

Average long-term US mortgage rates rose to 5.51% this week and are expected to rise further as the Federal Reserve continues its aggressive measures to combat four-decade high inflation. Most economists expect the Fed to raise its benchmark interest rate by at least another half point when it meets later this month. Last month it increased the rate by three-quarters of a point, the largest single increase since 1994.

Wells saw an increase in interest income, which rose 16% to $10.2 billion from $8.8 billion in the second quarter of last year. The bank said its non-interest income was down 40%, reflecting in part a decline in deals and fewer publicly traded companies. The bank posted $576 million in losses related to its venture capital investments as the stock market continued its decline in the second quarter.

Like other big banks, Wells also increased its loan loss provisions, setting aside $580 million to cover potentially bad loans during economic downturns. JPMorgan Chase, which reported tepid second-quarter results on Thursday, set aside $428 million to cover defaults.

JPMorgan also reported on Thursday that its investment banking revenue fell about 60%.

Bank stocks have been hit hard this year as investors fear the Fed’s moves to rein in inflation could push the US economy into recession. A recession would mean that some Americans would lose their jobs and likely start falling behind on their loans. These fears have more than offset the higher income that banks have earned from higher interest rates.

Wells Fargo shares were up more than 4% on Thursday morning but are still down more than 17% this year.

Wells is still trying to get out of strict federal guidelines that set his asset cap at just under $2 billion, hampering his ability to grow.

The Federal Reserve capped the size of Wells Fargo’s assets in 2018 after a series of scandals, most notably the discovery of millions of fake checking accounts opened by its employees to meet sales quotas.

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