With a steep drop in business for its Des Moines-based home lending division, Wells Fargo & Co.'s profits decreased by almost half in its most recent quarter.
The banking giant on Friday reported net income of $3.12 billion for the period of April, May and June. That's down from the $6.04 billion that Wells Fargo earned during the same period last year.
A decrease in customers taking out mortgages was the biggest driver of the change, as the San Francisco-based bank recorded $972 million in revenue during the quarter, down 53% from $2.07 billion during the same period in 2021.
Mortgage originations have dropped significantly throughout the industry this year as the Federal Reserve's Open Markets Committee increased interest rates to slow the pace of inflation. June's 9.1% increase in the inflation rate was the most since the early 1980s.
From January through March, Wells Fargo reported a 33% year-over-year drop in home lending revenue. The downturn in the segment has particularly hurt the company's central Iowa employees. Since April, the company has laid off about 200 workers from the home lending unit, the metro's largest private employer.
Chief Financial Officer Mike Santomassimo told analysts during a call Friday that the mortgage business will likely continue to struggle for the rest of the year.
“The mortgage market is expected to remain challenging in the near term, and it’s possible that we have a further decline in mortgage banking revenue in the third quarter," he said. "We are making adjustments to reduce expenses in response to the lower origination volumes, and we expect these adjustments will continue over the next couple of quarters.”
The Mortgage Bankers Association projects that mortgage originations will remain significantly below 2021 levels for the next few years. After recording about $3.99 billion worth of originations last year, the association projects revenues of $2.41 billion across the industry this year, a 40% drop.
Even though investors expected a downturn for Wells Fargo, Friday's report was worse than Wall Street's forecast. Wells Fargo reported $17.08 billion in total revenue, about $450 million shy of the consensus estimation among analysts, according to FactSet.
The company's financial report was in part dragged down by an accounting maneuver, as Wells Fargo set aside about $580 million for projected credit losses, anticipating that customers won't be able to pay back some loans because of a future downturn in the economy. The company made a similar adjustment in 2020, though the recession induced by that year's pandemic shutdowns turned out to be short lived. Wells Fargo later released those funds from reserves.
Despite the bad news, the market responded positively to Friday's report, with the company's stock price increasing about 6% by the afternoon. Wells Fargo's stock has dropped by 19% since the beginning of the year, about in line with the KBW Bank Index.
In a statement Friday, CEO Charlie Scharf struck an optimistic tone, pointing out that Wells Fargo should earn more money as interest rates continue to rise — even if fewer people take out mortgages.
"Our results should continue to benefit from the rising interest rate environment with growth in net interest income expected to more than offset any further near-term pressure on noninterest income," Scharf said.
As of Thursday, the average 30-year fixed-rate mortgage in the United States carried a 5.5% interest rate, up from 3.1% at the beginning of the year. That's still a historically low rate, but it means home shoppers' spending power is reduced at a time when home prices — like the $283,500 median the Des Moines Area Association of Realtors recorded for the metro in June — continue to set records.
With costs for everything from cars to food to fuel rising quickly, the Federal Reserve has attempted to slow the economy by increasing interest rates this year. The Open Markets Committee raised its baseline interest rate by 0.75 percentage points in June, the largest hike since 1994.
After the U.S. Bureau of Labor Statistics released its latest inflation report Wednesday, showing that costs continued to rise in June, many investors believe the Federal Reserve will increase the baseline rate by a full percentage point at its next meeting July 26. This would mark the biggest hike at a single meeting since the 1980s.
Despite the major drop in home lending, Wells Fargo reported gains in some other segments. The company's earnings in middle-market banking increased by $308 million. Earnings on credit card lending increased $86 million.
In a June 30 preview of Wells Fargo's earnings, Piper Sandler analyst Scott Siefer wrote that modeling the company's performance was difficult because of how fast the markets shifted. He said the company would make more money on each loan but see fewer customers.
"It seems clear to us that this will be a really solid (net interest income quarter) for (Wells Fargo), but fees should represent a real pressure point," he wrote.
This article originally appeared on Des Moines Register: Wells Fargo profits fall as Des Moines-based mortgage business dives