Wells Fargo & Co reported a 21 per cent reduction in first-quarter profit, but topped Wall Street projections, as cash set aside to cover potential pandemic-related loan losses were released, cushioning a drop in mortgage lending.

According to Refinitiv data, the fourth-largest U.S. lender earned $3.67 billion, or 88 cents per share, compared to an average analyst forecast of 80 cents per share. Total revenue dropped 5 per cent to $17.59 billion, compared to $17.8 billion expected.

The bank’s stock dropped by more than 3 per cent. Analysts believe this reflects investor concerns that the bank’s profits were inflated by the release of $1.1 billion in reserves set aside for pandemic-related losses that never materialised, as well as the bank’s failure to fulfil expectations on cutting costs.

“Total revenue was slightly below expectations, with mixed results,” wrote Edward Jones analyst Kyle Sanders.

The Federal Reserve is raising interest rates to manage rising inflation, and the situation in Ukraine is producing instability and concern in the broader global economy, thus big US banks are releasing first-quarter earnings. According to economists, this could start to stifle consumer spending and loan growth.

However, according to Wells Fargo Chief Financial Officer Mike Santomassimo, the American consumer is well and spending, and inflation is not now a credit issue.

As the United States recovers from the Covid-19 pandemic, consumer spending has been growing for months, as people make up for missed time by travelling, shopping, and dining out.

“People come into this in a pretty healthy position to deal with any potential challenges,” he said on a conference call. “Inflation is definitely having an impact on people. But so far that hasn’t translated into any real stress from a credit perspective,” said Santomassimo.

These factors, together with 3% loan growth and Fed rate hikes, prompted the bank to raise its full-year net interest income (NII) projection to roughly 15% from 8% last quarter. The NII, a frequently monitored indicator of how much money banks make from lending, increased by 5% in the third quarter.

Wells Fargo relies primarily on revenue from its consumer and corporate banking businesses since, unlike Citigroup and JPMorgan Chase & Co., it does not have a large capital markets section.

Overall, average loans increased by 3 per cent, helped by credit card and auto lending, which increased by 6 per cent and 10 per cent, respectively. Purchase volumes by debit cards increased by 6 per cent, while credit card point-of-sale volumes increased by 33 per cent. Mortgage loans, on the other hand, dropped 33% year over year due to decreased originations and gains from property sales.

“They had some headwinds from mortgage banking. But loan growth was broad based – in consumer and commercial – and asset quality remains pristine,” said John Mackerey, senior vice president in DBRS Morningstar’s global financial institutions group.

Non-interest expenses of the bank declined 1 per cent as a result of workforce reductions and real estate divestitures. While this was in line with Chief Executive Officer Charles Scharf’s long-term goal of saving $10 billion per year, analysts expected better progress and pointed out that the bank has incurred costs connected to resolving consumer complaints about earlier sales practises.

According to Sanders, this may have harmed investors’ faith in the bank’s ability to recover from its crises and be liberated from a Federal Reserve asset cap that limits its lending growth.

“While today was a fresh reminder that WFC still has a lot of work to, we expected some setbacks along the way in the long-term turnaround story we see at the company,” Sanders added.

(Adapted from USNews.com)

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